Working Paper: CEPR ID: DP10895
Authors: Paul Luk; David Vines
Abstract: This paper studies the coordination of monetary and fiscal policy in a simple New Keynesian model. We show that, in such a setup and when the policymaker acts with commitment, it is optimal not to use fiscal policy to stabilise inflation. We illustrate this result using additively separable preferences and Greenwood-Hercowitz-Huffman (1988) preferences, and we discuss the intuition behind this result.
Keywords: fiscal policy; monetary policy; New Keynesian model
JEL Codes: E52; E61; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy (E52) | Inflation (E31) |
| Increase in nominal interest rate (E43) | Reduction in consumption (D12) |
| Increase in nominal interest rate (E43) | Increase in labor supply (J20) |
| Reduction in government spending (H69) | Reduction in demand (D12) |
| Reduction in government spending (H69) | Inflation (E31) |
| Government spending (H59) | Inflation (E31) |