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Five-Equation Macroeconomics A Simple View of the Interactions Between Fiscal Policy and Monetary Policy

Author

Listed:
  • Tatiana Kirsanova

    (Department of Economics, University of Exeter)

  • Sven Jari Stehn

    (Brasenose College, University of Oxford)

  • David Vines

    (Economics Department and Balliol College, University of Oxford, Australian National University and CEPR)

Abstract

This paper studies the interactions of fiscal and monetary policy when they stabilise a single economy against shocks in a dynamic setting. We assume that fiscal and monetary policies both stabilise the economy only by causing changes to aggregate demand. Our findings are as follows. If the both policymakers are benevolent, then the best outcome is achieved when the fiscal authority allows monetary policy to perform nearly all of the burden of stabilising the economy. If the monetary authorities are benevolent, but the fiscal authorities have distorted objectives, then a Nash equilibrium will result in large welfare losses: unilateral efforts by each authority to stabilise the economy will result in a rapid accumulation of public debt. However, if the monetary authorities are benevolent and the fiscal authorities have distorted objectives, but there is a regime of fiscal leadership, then the outcome will be very nearly as good as it is in the regime in which both policymakers are benevolent.

Suggested Citation

  • Tatiana Kirsanova & Sven Jari Stehn & David Vines, 2006. "Five-Equation Macroeconomics A Simple View of the Interactions Between Fiscal Policy and Monetary Policy," Discussion Papers 0610, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:0610
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    File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP0610.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Monetary Policy; Fiscal Policy; Macroeconomic Stabilisation;

    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
    • 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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