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Cheap Talk in a New Keynesian Model

Author

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  • Dennis Wesselbaum

    (Department of Economics, University of Otago, New Zealand)

Abstract

This paper shows that the stance of fiscal policy does have significant impact on the conduct of monetary policy in the United States. Further, we document that the implied fiscal-monetary policy interactions are subject to regime instability, using a Markov-switching model. Then, we develop a microfoundation of regime switches using a cheap talk game between central bank and government. As a case study, we simulate the effects of regime switches within an otherwise standard New Keynesian model using the cheap talk game in the state-space of our model.

Suggested Citation

  • Dennis Wesselbaum, 2016. "Cheap Talk in a New Keynesian Model," Working Papers 1604, University of Otago, Department of Economics, revised Feb 2016.
    • Handle: RePEc:otg:wpaper:1604
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    File URL: http://www.otago.ac.nz/economics/otago557004.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Markov-switching; Monetary and Fiscal Policy Interactions; Policy Coordination Games; Sequential Games;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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