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Monetary Exit Strategy and Fiscal Spillovers

Author

Listed:
  • Jan Libich
  • Dat Thanh Nguyen
  • Petr Stehlík

Abstract

The paper models strategic monetary-fiscal interactions in the aftermath of the global financial crisis - in a single country as well as a monetary union. It depicts both the short-term (stabilization) perspective and the long-term (sustainability) perspective, and the link between them. This is done in a game theoretic framework that allows for revisions of actions, deterministic or stochastic. In addition, we consider incomplete information about economic conditions, and different types of government. We find that, under ambitious fiscal policies, a legislated long-term monetary commitment may: (i) reduce the risk of a double-dip recession and deflation in the short-term, and at the same time (ii) facilitate the ‘exit strategy’ of monetary policy, ie prevent sub-optimally high future inflation caused by fiscal spillovers. Our analysis thus implies that an explicit numerical target for average inflation may play the role of a monetary ‘credibility insurance’ over all phases of the business cycle, and is beneficial especially in countries facing fiscal stress.

Suggested Citation

  • Jan Libich & Dat Thanh Nguyen & Petr Stehlík, 2011. "Monetary Exit Strategy and Fiscal Spillovers," CAMA Working Papers 2011-04, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2011-04
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2017-02/4_libich_nguyen_stehlik_2011.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Michal Franta & Jan Libich & Petr Stehlík, 2012. "Tracking Monetary-Fiscal Interactions across Time and Space," CAMA Working Papers 2012-40, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. repec:taf:oabmxx:v:3:y:2016:i:1:p:1154283 is not listed on IDEAS
    3. repec:ijc:ijcjou:y:2018:q:2:a:4 is not listed on IDEAS
    4. Eddie Gerba & Klemens Hauzenberger, 2013. "Estimating US Fiscal and Monetary Interactions in a Time Varying VAR," Studies in Economics 1303, School of Economics, University of Kent.
    5. Libich, Jan & Nguyen, Dat Thanh & Stehlík, Petr, 2015. "Monetary exit and fiscal spillovers," European Journal of Political Economy, Elsevier, vol. 40(PA), pages 184-206.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General

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