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Fiscal Policy and Optimal Monetary Rules in a non Ricardian Economy

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  • Jean-Pascal Benassy

    (CEPREMAP)

Abstract

We study in this article how the conduct of fiscal policy interacts with the choice of oprimal monetary rules by a central bank. We consider a non Ricardian model with nondistortionary fiscal policyt, and compare two policy packages, one where fiscal and monetary policy are simultaneously optimized, and one where the monetary policy is optimized under a given fiscal policy. We find a number of results that would not appear in the traditional Ricardian framework: (a) the optimal monetary rule may be activist when fiscal policy is kept constant, whereas it is not when combined with optimal fiscal policy; (b) combining optimally fiscal and monetary policies may lead to far superior outcomes, even when, following Sargent and Wallace (1975), government is allowed to react to much less information. (Copyright: Elsevier)

Suggested Citation

  • Jean-Pascal Benassy, 2003. "Fiscal Policy and Optimal Monetary Rules in a non Ricardian Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 498-512, July.
  • Handle: RePEc:red:issued:v:6:y:2003:i:3:p:498-512
    DOI: 10.1016/S1094-2025(03)00017-6
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Javier Andrés & Rafael Doménech & Campbell Leith, 2006. "Fiscal Policy, Macroeconomic Stability And Finite Horizons," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(1), pages 72-89, February.
    2. Marcela Meirelles Aurelio, 2005. "The performance of monetary and fiscal rules in an open economy with imperfect capital mobility," Research Working Paper RWP 05-01, Federal Reserve Bank of Kansas City.
    3. Xavier Ragot, 2005. "A theory of low inflation in a non Ricardian economy with credit constraints," PSE Working Papers halshs-00590788, HAL.

    More about this item

    Keywords

    Monetary policy rules; fiscal policy; interest rate rules; optimal policy; nominal rigidities.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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