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Interactions Between Monetary and Fiscal Policy Under Flexible Exchange Rates

  • Leith, Campbell

    (University of Glasgow)

  • Simon Wren-Lewis

We extend the fiscal theory of the price level (FTPL) by developing a two-country open-economy model under flexible exchange rates, where overlapping generations of consumers supply labour to imperfectly competitive firms which change their prices infrequently. We show that the fiscal response required to support an active inflation-targeting monetary policy is greater when consumers have finite lives. Additionally, one monetary authority can abandon its active targeting of inflation to stabilise the debt of a fiscal authority, even if the policy makers operate in different countries. Finally, through simulations, we consider the impact of fiscal shocks on key macroeconomic variables.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 134.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:134
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  25. De Fiore, Fiorella & Liu, Zheng, 2005. "Does trade openness matter for aggregate instability?," Journal of Economic Dynamics and Control, Elsevier, vol. 29(7), pages 1165-1192, July.
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  27. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
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