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On the Joint Determination of Fiscal and Monetary Policy

Abstract

In the absence of government commitment, the conduct of fiscal and monetary policy depends on the sign of inherited net nominal government obligations. When these obligations are negative, monetary policy is non-distortionary and fiscal policy distortions are smoothed over time, either forever or for a finite number of periods, depending on the initial state. For positive net nominal government obligations, both fiscal and monetary policies are distortionary, and there exists a unique and stable steady state. At this steady state, a reform endowing the government with a commitment technology has no effect on policy. For any level of initial debt, the estimated welfare loss due to lack of government commitment is small.

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File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp09-01.pdf
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Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp09-01.

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Length: 29
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:sfu:sfudps:dp09-01
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Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Keywords: money; inflation; government debt; time-consistency; lack of commitment;

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Find related papers by JEL classification:
  • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
  • 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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Cited by:

  1. Fernando M. Martin, 2011. "Government policy response to war-expenditure shocks," Working Papers 2011-028, Federal Reserve Bank of St. Louis.
  2. Fernando Martin, 2012. "Debt, Inflation and Central Bank Independence," 2012 Meeting Papers 1019, Society for Economic Dynamics.
  3. David Miller, 2014. "Commitment versus Discretion in a Political Economy Model of Fiscal and Monetary Policy Interaction," 2014 Meeting Papers 80, Society for Economic Dynamics.
  4. Fernando M. Martin, 2011. "Policy and welfare effects of within-period commitment," Working Papers 2011-031, Federal Reserve Bank of St. Louis.
  5. Fernando M. Martin, 2010. "Government Policy in Monetary Economies," Discussion Papers dp10-01, Department of Economics, Simon Fraser University.
  6. Fernando M. Martin, 2011. "Lagos-Wright vs. Cash-in-Advance: Government Policy Response to War-Expenditure Shocks," 2011 Meeting Papers 745, Society for Economic Dynamics.
  7. Joost Röttger, 2014. "Monetary and Fiscal Policy with Sovereign Default," Working Paper Series in Economics 74, University of Cologne, Department of Economics.

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