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Interactions Between Monetary and Fiscal Policy Under Flexible Exchange Rates

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Author Info
Leith, Campbell (University of Glasgow)
Simon Wren-Lewis

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Abstract

We extend the fiscal theory of the price level (FTPL) by developing a two-country open-economy model under flexible exchange rates, where overlapping generations of consumers supply labour to imperfectly competitive firms which change their prices infrequently. We show that the fiscal response required to support an active inflation-targeting monetary policy is greater when consumers have finite lives. Additionally, one monetary authority can abandon its active targeting of inflation to stabilise the debt of a fiscal authority, even if the policy makers operate in different countries. Finally, through simulations, we consider the impact of fiscal shocks on key macroeconomic variables.

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Publisher Info
Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 134.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:134

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Related research
Keywords: monetary policy; fiscal policy; new open economy macroeconomics; fiscal theory of the price level;

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Find related papers by JEL classification:
E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
    Other versions:
  3. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-60, June. [Downloadable!] (restricted)
    Other versions:
  4. Campbell Leith & Simon Wren-Lewis, 2002. "Taylor Rules in the Open Economy," Working Papers 2002_14, Department of Economics, University of Glasgow. [Downloadable!]
  5. Bergin, Paul R., 2000. "Fiscal solvency and price level determination in a monetary union," Journal of Monetary Economics, Elsevier, vol. 45(1), pages 37-53, February. [Downloadable!] (restricted)
  6. Daniel, Betty C., 2001. "The fiscal theory of the price level in an open economy," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 293-308, October. [Downloadable!] (restricted)
  7. C.A. Sims, 1999. "The Precarious Fiscal Foundations of EMU," DNB Staff Reports (discontinued) 34, Netherlands Central Bank. [Downloadable!]
  8. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270. [Downloadable!] (restricted)
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  9. Woodford, Michael, 1995. "Price-level determinacy without control of a monetary aggregate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 43(1), pages 1-46, December. [Downloadable!] (restricted)
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  10. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Canzoneri, Matthew B & Cumby, Robert & Diba, Behzad, 1998. "Is the Price Level Determined by the Needs of Fiscal Solvency?," CEPR Discussion Papers 1772, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. Leith, Campbell & Wren-Lewis, Simon, 2000. "Interactions between Monetary and Fiscal Policy Rules," Economic Journal, Royal Economic Society, vol. 110(462), pages C93-108, March. [Downloadable!] (restricted)
  13. Lawrence J. Christiano & Terry J. Fitzgerald, 2000. "Understanding the fiscal theory of the price level," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-38. [Downloadable!]
    Other versions:
  14. Campbell leith & Jim Malley, 2002. "Estimated General Equilibrium Models for the Evaluation of Monetary Policy in the US and Europe," Working Papers 2001_16, Department of Economics, University of Glasgow. [Downloadable!]
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  15. Gali, Jordi, 1994. "Government size and macroeconomic stability," European Economic Review, Elsevier, vol. 38(1), pages 117-132, January. [Downloadable!] (restricted)
  16. Dupor, Bill, 2000. "Exchange rates and the fiscal theory of the price level," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 613-630, June. [Downloadable!] (restricted)
  17. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December. [Downloadable!] (restricted)
  18. Canzoneri, Matthew B & Cumby, Robert E & Diba, Behzad T, 2001. "Fiscal Discipline and Exchange Rate Systems," Economic Journal, Royal Economic Society, vol. 111(474), pages 667-90, October. [Downloadable!] (restricted)
  19. Campbell leith & Simon Wren-Lewis, . "Compatibility Between Monetary and Fiscal Policy Under EMU," Working Papers 2001_15, Department of Economics, University of Glasgow. [Downloadable!]
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Herings P. Jean-Jacques & Peeters Ronald & Yang Michael S., 2009. "Piracy on the internet: Accommodate it or fight it? A dynamic approach," Research Memoranda 034, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
  2. Railavo , Jukka, 2004. "Stability consequences of fiscal policy rules," Research Discussion Papers 1/2004, Bank of Finland. [Downloadable!]
  3. Peter CLAEYS, 2004. "Monetary and budgetary policy interaction: an SVAR analysis of stabilisation policies in monetary union," Economics Working Papers ECO2004/22, European University Institute. [Downloadable!]
  4. Jukka Railavo, 2004. "Stability consequences of fiscal policy rules," Macroeconomics 0404020, EconWPA. [Downloadable!]
  5. Jukka Railavo, 2004. "Effects of the supply-side channel on stabilisation properties of policy rules," Macroeconomics 0404028, EconWPA. [Downloadable!]
  6. Railavo, Jukka, 2003. "Effects of the supply-side channel on stabilisation properties of policy rules," Research Discussion Papers 34/2003, Bank of Finland. [Downloadable!]
  7. Eleni Iliopulos & Marcus Miller, 2007. "UK External Imbalances and the Sterling: Are they on a Sustainable Path?," Open Economies Review, Springer, vol. 18(5), pages 539-557, November. [Downloadable!] (restricted)
  8. Campbell Leith & Simon Wren-Lewis, 2002. "Taylor Rules in the Open Economy," Working Papers 2002_14, Department of Economics, University of Glasgow. [Downloadable!]
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