Working Paper: NBER ID: w23746
Authors: Marek Jarocinski; Bartosz Makowiak
Abstract: When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. We specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB's objective.
Keywords: Monetary Policy; Fiscal Policy; Euro Area; Economic Malaise
JEL Codes: E31; E32; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy (E62) | Output (Y10) |
| Monetary policy (E52) | Output (Y10) |
| Fiscal policy (E62) | Inflation (E31) |
| Monetary policy (E52) | Inflation (E31) |
| Default premium on bonds (G12) | Output (Y10) |
| Default premium on bonds (G12) | Inflation (E31) |
| Expectations of default (G33) | Default premium on bonds (G12) |
| Centrally operated fund (G23) | Output (Y10) |
| Centrally operated fund (G23) | Inflation (E31) |
| National fiscal authority deviation (H69) | Inflation (E31) |