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Five-Equation Macroeconomics: A Simple View of the Interactions Between Fiscal Policy and Monetary Policy

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Author Info
Kirsanova, Tatiana
Stehn, Sven Jari
Vines, David

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Abstract

This paper studies the interactions of fiscal and monetary policy when they stabilise a single economy against shocks in a dynamic setting. We assume that fiscal and monetary policies both stabilise the economy only by causing changes to aggregate demand. Our findings are as follows. If the both policymakers are benevolent, then the best outcome is achieved when the fiscal authority allows monetary policy to perform nearly all of the burden of stabilising the economy. If the monetary authorities are benevolent, but the fiscal authorities have distorted objectives, then a Nash equilibrium will result in large welfare losses: unilateral efforts by each authority to stabilise the economy will result in a rapid accumulation of public debt. However, if the monetary authorities are benevolent and the fiscal authorities have distorted objectives, but there is a regime of fiscal leadership, then the outcome will be very nearly as good as it is in the regime in which both policymakers are benevolent.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5464.

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Date of creation: Jan 2006
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Handle: RePEc:cpr:ceprdp:5464

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Related research
Keywords: fiscal policy macroeconomic stabilisation monetary policy

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization

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  1. Dramani, Latif, 2007. "Multi country model in CFA zone," MPRA Paper 3201, University Library of Munich, Germany. [Downloadable!]
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