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Monetary and Fiscal Policy Interaction: The Current Consensus Assignment in the Light of Recent Developments

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  • Tatiana Kirsanova
  • Campbell Leith
  • Simon Wren-Lewis

Abstract

In the last few years papers have begun to analyse optimal monetary and fiscal policy in models incorporating nominal rigidities where social welfare is derived from the utility of agents. This article examines whether this analysis provides support for the consensus assignment, where monetary policy controls demand and inflation and fiscal policy controls government debt. We argue that the basic structure of New Keynesian models implies that monetary policy dominates fiscal policy as a means of controlling inflation. No similar dominance appears to operate for fiscal policy and debt, if debt has to return to its initial level after shocks. Copyright � The Author(s). Journal compilation � Royal Economic Society 2009.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 119 (2009)
Issue (Month): 541 (November)
Pages: F482-F496

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Handle: RePEc:ecj:econjl:v:119:y:2009:i:541:p:f482-f496

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Does Monetary Policy make Austerity Irrelevant?
    by Mainly Macro in Mainly Macro on 2012-05-28 17:52:00
  2. Being rude about austerity
    by Mainly Macro in Mainly Macro on 2012-11-04 13:49:00
  3. 'Being Rude about Austerity'
    by Mark Thoma in Economist's View on 2012-11-04 10:14:00
  4. Monetary versus Fiscal: an odd debate
    by Mainly Macro in Mainly Macro on 2014-01-06 18:46:00
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Cited by:
  1. Vladimir Tomsik, 2012. "Some insights into monetary and fiscal policy interactions in the Czech Republic," BIS Papers chapters, in: Bank for International Settlements (ed.), Fiscal policy, public debt and monetary policy in emerging market economies, volume 67, pages 161-171 Bank for International Settlements.
  2. Campbell Leith & Ioana Moldovan & Raffaele Rossi, 2009. "Monetary and fiscal policy under deep habits," Working Papers 2009_32, Business School - Economics, University of Glasgow.
  3. Ascari, Guido & Rankin, Neil, 2013. "The effectiveness of government debt for demand management: Sensitivity to monetary policy rules," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1544-1566.
  4. Eric M. Leeper, 2010. "Monetary science, fiscal alchemy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 361-434.
  5. Simon Wren-Lewis, 2011. "Comparing the delegation of monetary and fiscal policy," Economics Series Working Papers 540, University of Oxford, Department of Economics.
  6. Fabian Eser, 2009. "Optimal Fiscal Stabilisation through Government Spending," Economics Series Working Papers 2009-W14, University of Oxford, Department of Economics.
  7. Levine, Paul & Pearlman, Joseph, 2011. "Monetary and Fiscal Policy in a DSGE Model of India," Working Papers 11/96, National Institute of Public Finance and Policy.
  8. Campbell Leith & Simon Wren-Lewis, 2010. "Discretionary policy in a monetary union with sovereign debt," Working Papers 2010_23, Business School - Economics, University of Glasgow.
  9. Barbara Annicchiarico & Fabio Di Dio & Francesco Felici & Francesco Nucci, . "Macroeconomic Modelling and the Effects of Policy Reforms: an Assessment for Italy using ITEM and," Working Papers 1, Department of the Treasury, Ministry of the Economy and of Finance.
  10. Apostolis Philippopoulos & Petros Varthalitis & Vanghelis Vassilatos, 2013. "Optimal Fiscal Action in an Economy with Sovereign Premia and without Monetary Independence: An Application to Italy," CESifo Working Paper Series 4199, CESifo Group Munich.
  11. Apostolis Philippopoulos & Petros Varthalitis & Vanghelis Vassilatos, 2012. "On the optimal mix of fiscal and monetary policy actions," Working Papers 150, Bank of Greece.
  12. Alho, Kari E.O., 2011. "How to Restore Sustainability of the Euro?," Discussion Papers 1259, The Research Institute of the Finnish Economy.

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