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Interactions Between Monetary and Fiscal Policy Under Flexible Exchange Rates

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  • Leith, Campbell

    (University of Glasgow)

  • Simon Wren-Lewis

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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Bibliographic 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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Web page: http://www.res.org.uk/society/annualconf.asp
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Keywords: monetary policy; fiscal policy; new open economy macroeconomics; fiscal theory of the price level;

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Citations

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Cited by:
  1. 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.
  2. Linnemann, Ludger, 2006. "Interest rate policy, debt, and indeterminacy with distortionary taxation," Journal of Economic Dynamics and Control, Elsevier, vol. 30(3), pages 487-510, March.
  3. Robert Ambrisko & Jan Babecky & Jakub Rysanek & Vilem Valenta, 2012. "Assessing the Impact of Fiscal Measures on the Czech Economy," Working Papers 2012/15, Czech National Bank, Research Department.
  4. Lieb Lenard, 2009. "Taking Real Rigidities Seriously: Implications for Optimal Policy Design in a Currency Union," Research Memorandum 032, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  5. Marcin Bielecki & Karolina Goraus & Jan Hagemejer & Krzysztof Makraski & Joanna Tyrowicz, 2014. "Small assumptions (can) have a large bearing: evaluating pension system reforms with OLG models," Working Papers 2014-20, Faculty of Economic Sciences, University of Warsaw.
  6. Jukka Railavo, 2004. "Effects of the supply-side channel on stabilisation properties of policy rules," Macroeconomics 0404028, EconWPA.
  7. Campbell Leith & Simon Wren-Lewis, 2002. "Taylor Rules in the Open Economy," Discussion Papers 0203, Exeter University, Department of Economics.
  8. 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.
  9. Railavo , Jukka, 2004. "Stability consequences of fiscal policy rules," Research Discussion Papers 1/2004, Bank of Finland.
  10. 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.
  11. Railavo, Jukka, 2003. "Effects of the supply-side channel on stabilisation properties of policy rules," Research Discussion Papers 34/2003, Bank of Finland.
  12. Mikek, Peter, 2008. "Alternative monetary policies and fiscal regime in new EU members," Economic Systems, Elsevier, vol. 32(4), pages 335-353, December.
  13. Apostolis Philippopoulos & Petros Varthalitis & Vanghelis Vassilatos, 2012. "On the optimal mix of fiscal and monetary policy actions," Working Papers 150, Bank of Greece.
  14. Eleni Iliopulos & Marcus Miller, 2006. "Can Using Interest Rates to Check Domestic Demand Raise the Strength of the Sterling in the Long Run?," Documents de recherche 06-13, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  15. Jukka Railavo, 2004. "Stability consequences of fiscal policy rules," Macroeconomics 0404020, EconWPA.

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