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On the joint determination of fiscal and monetary policy

  • Martin, Fernando M.

The conduct of fiscal and monetary policy absent commitment depends on the interaction between the objective of smoothing distortions intertemporally and a time-consistency problem. When net nominal government obligations are positive, both fiscal and monetary policies are distortionary and the choice of debt depends on how the anticipated response in future monetary policy affects the current demand for money and bonds. There exists a unique steady state with positive net nominal government obligations, which is stable and time-consistent. For any initial level of debt, the welfare loss due to lack of commitment is small.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 58 (2011)
Issue (Month): 2 (March)
Pages: 132-145

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Handle: RePEc:eee:moneco:v:58:y:2011:i:2:p:132-145
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