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Government Policy in Monetary Economies

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Abstract

I study how the specific details of a micro founded monetary economy affect the determination of government policy. I consider three variants of the Lagos-Wright monetary framework: a benchmark were all markets are competitive; a case which allows for financial intermediaries; and a case with trading frictions. Although intitutions/frictions are shown to have a significant structural impact in the determination of policy, the calibrated artificial economies are observationally equivalent in steady state. The policy response to aggregate shocks is qualitatively similar in the variants considered. However, there are significant quantitative differences in the response of government policy to productivity shocks, mainly due to the idiosyncratic behavior of money demand. The variants with no trading frictions display the best fit to U.S. post-war data.

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File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp10-01.pdf
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Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp10-01.

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Length: 36
Date of creation: Jun 2010
Handle: RePEc:sfu:sfudps:dp10-01
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Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada

Phone: (778)782-3508
Fax: (778)782-5944
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Keywords: government policy; lack of commitment; financial intermediation; trading frictions; micro founded models of money;

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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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  1. Marco Battaglini & Stephen Coate, 2008. "A Dynamic Theory of Public Spending, Taxation, and Debt," American Economic Review, American Economic Association, vol. 98(1), pages 201-236, March.
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  8. Salvador Ortigueira, 2006. "Markov-Perfect Optimal Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 153-178, January.
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  15. Martin Fernando M., 2012. "Government Policy Response to War-Expenditure Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-40, July.
  16. Gomis-Porqueras, Pedro & Peralta-Alva, Adrian, 2010. "Optimal monetary and fiscal policies in a search theoretic model of monetary exchange," European Economic Review, Elsevier, vol. 54(3), pages 331-344, April.
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  18. Niemann, S & Pichler, P & Sorger, G, 2009. "Inflation dynamics under optimal discretionary fiscal and monetary policies," Economics Discussion Papers 2898, University of Essex, Department of Economics.
  19. Martin, Fernando M., 2010. "Markov-perfect capital and labor taxes," Journal of Economic Dynamics and Control, Elsevier, vol. 34(3), pages 503-521, March.
  20. Azzimonti, Marina & Sarte, Pierre-Daniel & Soares, Jorge, 2009. "Distortionary taxes and public investment when government promises are not enforceable," Journal of Economic Dynamics and Control, Elsevier, vol. 33(9), pages 1662-1681, September.
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Cited by:

  1. Martin, Fernando M., 2011. "On the joint determination of fiscal and monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(2), pages 132-145, March.
  2. Eric M Leeper & Campbell Leith & Ding Liu, 2016. "Optimal Time-Consistent Monetary, Fiscal and Debt Maturity Policy," Working Papers 2016_04, Business School - Economics, University of Glasgow.
  3. Martin, Fernando M., 2015. "Debt, inflation and central bank independence," European Economic Review, Elsevier, vol. 79(C), pages 129-150.
  4. Grechyna, Daryna, 2016. "Debt And Deficit Fluctuations In A Time-Consistent Setup," Macroeconomic Dynamics, Cambridge University Press, vol. 20(07), pages 1771-1794, October.
  5. Joost Röttger, 2014. "Monetary and Fiscal Policy with Sovereign Default," Working Paper Series in Economics 74, University of Cologne, Department of Economics.
  6. Martin Fernando M., 2012. "Government Policy Response to War-Expenditure Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-40, July.
  7. Russell Wong & Cathy Zhang & Guillaume Rocheteau, 2017. "Lending Relationships, Banking Crises and Optimal Monetary Policies," 2017 Meeting Papers 152, Society for Economic Dynamics.
  8. Chao Gu & Han Han & Randall Wright, 2016. "The Effects of Monetary Policy and Other Announcements," Working Papers 1621, Department of Economics, University of Missouri.
  9. Parag Waknis, 2011. "Endogenous Monetary Policy: A Leviathan Central Bank in a Lagos-Wright Economy," Working papers 2011-20, University of Connecticut, Department of Economics.

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