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On the Joint Determination of Fiscal and Monetary Policy

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Abstract

In the absence of government commitment, the conduct of fiscal and monetary policy depends on the sign of inherited net nominal government obligations. When these obligations are negative, monetary policy is non-distortionary and fiscal policy distortions are smoothed over time, either forever or for a finite number of periods, depending on the initial state. For positive net nominal government obligations, both fiscal and monetary policies are distortionary, and there exists a unique and stable steady state. At this steady state, a reform endowing the government with a commitment technology has no effect on policy. For any level of initial debt, the estimated welfare loss due to lack of government commitment is small.

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Bibliographic Info

Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp09-01.

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Length: 29
Date of creation: Sep 2009
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Handle: RePEc:sfu:sfudps:dp09-01

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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Web: http://www.sfu.ca/economics/research/publications.html

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Keywords: money; inflation; government debt; time-consistency; lack of commitment;

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References

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Cited by:
  1. Fernando M. Martin, 2011. "Government policy in monetary economies," Working Papers 2011-026, Federal Reserve Bank of St. Louis.
  2. Fernando M. Martin, 2011. "Lagos-Wright vs. Cash-in-Advance: Government Policy Response to War-Expenditure Shocks," 2011 Meeting Papers 745, Society for Economic Dynamics.
  3. Fernando M. Martin, 2011. "Policy and welfare effects of within-period commitment," Working Papers 2011-031, Federal Reserve Bank of St. Louis.
  4. Martin Fernando M., 2012. "Government Policy Response to War-Expenditure Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-40, July.
  5. Fernando Martin, 2012. "Debt, Inflation and Central Bank Independence," 2012 Meeting Papers 1019, Society for Economic Dynamics.

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