Working Paper: CEPR ID: DP14694
Authors: Marcus Hagedorn; Kurt Mitman
Abstract: In this note, we analyze the role of the European Central Bank through the lens of the Heterogenous-agent New Keynesian Model (HANK), a new paradigm of fiscal and monetary policy that abandons the assumption of perfectly functioning financial markets. We emphasize three principles that emerge from this view: 1) the effect of fiscal and monetary financing on inflation; 2) the close interaction between fiscal and monetary policy in the determination of inflation; and 3) an economic perspective on Art.123(1) TFEU, the “prohibition of monetary financing.”
Keywords: HANK; Monetary Financing; Inflation; Article 123(1) TFEU; Fiscal-Monetary Policy Interaction
JEL Codes: D52; E31; E52; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal stimulus financed through debt (E62) | Inflation (E31) |
| Debt rolled over perpetually (H63) | Higher inflation (E31) |
| Raising taxes to repay debt (H69) | Lower inflation (E31) |
| Nominal demand stimulus (E19) | Price increases (E30) |
| Deficit-financed payments to citizens (H69) | Increase in inflation (E31) |
| Selective bond purchases (G12) | More effective for price stability (E64) |
| Conventional monetary policy tools limited (E52) | Fiscal instruments control inflation (E62) |