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Monetary-Fiscal Interactions and the Euro Area's Malaise

Listed author(s):
  • Marek Jarociński
  • Bartosz Maćkowiak

When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. We specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB's objective.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23746.

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Date of creation: Aug 2017
Handle: RePEc:nbr:nberwo:23746
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