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On the Joint Determination of Fiscal and Monetary Policy

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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
Handle: RePEc:sfu:sfudps:dp09-01
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