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The design of monetary and fiscal policy: a global perspective

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  • Jess Benhabib
  • Stefano Eusepi

Abstract

We study the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies. We show that the presence of capital is indeed another independent source of local and global multiplicities, even under active policies that yield local determinacy. We also show how a very similar mechanism generates multiplicities in models with bonds and distortionary taxation. We then explore the design of monetary policies that avoid multiple equilibria. We show that interest rate policies that respond to the output gap, while potentially a source of significant inefficiencies, may be effective in preventing multiple equilibria and costly oscillatory equilibrium dynamics.

Suggested Citation

  • Jess Benhabib & Stefano Eusepi, 2005. "The design of monetary and fiscal policy: a global perspective," Proceedings, Federal Reserve Bank of San Francisco.
  • Handle: RePEc:fip:fedfpr:y:2005:x:2
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    More about this item

    Keywords

    Monetary policy; Taylor's rule; Fiscal policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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; Treasury Policy

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