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Monetary-Fiscal Interactions: A Reappraisal

Author

Listed:
  • George-Marios Angeletos
  • Chen Lian
  • Christian K. Wolf
  • Dalton Rongxuan Zhang

Abstract

The possibility of fiscal dominance in the representative-agent New Keynesian model (RANK) hinges on the assumption that income is perpetually demand-determined: fiscal deficits can drive output and inflation within that model only insofar as they trigger infinitely lasting, self-sustained shifts in aggregate spending and income. Moving to heterogeneous-agent New Keynesian models (HANK) opens the door to a different pathway: classical non-Ricardian effects, due to finite horizons or liquidity constraints. A refinement motivated by the model's intended focus on short-run phenomena—requiring a return to flexible-price outcomes in finite time—arrests the infinite feedback loop between spending and income, leaving only the classical non-Ricardian mechanism, and makes sure that the study of monetary-fiscal interactions is not centered on hard-to-test assumptions regarding beliefs at infinity.

Suggested Citation

  • George-Marios Angeletos & Chen Lian & Christian K. Wolf & Dalton Rongxuan Zhang, 2026. "Monetary-Fiscal Interactions: A Reappraisal," NBER Working Papers 35642, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35642
    Note: EFG ME
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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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