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The Optimal Coordination of Fiscal and Monetary Policy in a New Keynesian Framework

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  • Vines, David
  • Luk, Paul

Abstract

This paper studies the coordination of monetary and fiscal policy in a simple New Keynesian model. We show that, in such a setup and when the policymaker acts with commitment, it is optimal not to use fiscal policy to stabilise inflation. We illustrate this result using additively separable preferences and Greenwood-Hercowitz-Huffman (1988) preferences, and we discuss the intuition behind this result.

Suggested Citation

  • Vines, David & Luk, Paul, 2015. "The Optimal Coordination of Fiscal and Monetary Policy in a New Keynesian Framework," CEPR Discussion Papers 10895, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:10895
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal policy; Monetary policy; New keynesian model;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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