Working Paper: NBER ID: w31246
Authors: Jesse Schreger; Pierre Yared; Emilio Zaratiegui
Abstract: We consider a New Keynesian model with strategic monetary and fiscal interactions. The fiscal authority maximizes social welfare. Monetary policy is delegated to a central bank with an anti-inflation bias that suffers from a lack of commitment. The impact of central bank hawkishness on debt issuance is non-monotonic because increased hawkishness reduces the benefit from fiscal stimulus while simultaneously increasing real debt capacity. Starting from high levels of hawkishness (dovishness), a marginal increase in the central bank's anti-inflation bias decreases (increases) debt issuance.
Keywords: No keywords provided
JEL Codes: E40; E44; E49; E50; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank hawkishness (E52) | debt issuance (H63) |
| central bank hawkishness (E52) | fiscal responsibility (E62) |
| hawkish central bank (E58) | discouragement of fiscal stimulus (E62) |
| hawkish central bank (E58) | higher expected interest rates (E43) |
| higher expected interest rates (E43) | debt issuance (H63) |
| hawkish central bank (E58) | increased real debt capacity (F34) |
| increased real debt capacity (F34) | more borrowing (H74) |
| central bank hawkishness (E52) | fiscal authority response (O23) |