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Optimal Monetary and Fiscal Policy Rules, Welfare Gains and Exogenous Shocks in an Economy with Default Risk

Author

Listed:
  • Okano Eiji

    (Nagoya City University)

  • Masataka Eguchi

    (Komazawa University)

Abstract

We develop a class of dynamic stochastic general equilibrium models with nominal rigidities and we introduce default risk in the model. We find that if productivity changes are observed, policy authorities should be aware of default risk, although being aware of such risk is not very important following government expenditure changes. Welfare gains from awareness of default risk are nonnegligible if productivity changes, although welfare gains from awareness of default risk are tiny following government expenditure changes.

Suggested Citation

  • Okano Eiji & Masataka Eguchi, 2019. "Optimal Monetary and Fiscal Policy Rules, Welfare Gains and Exogenous Shocks in an Economy with Default Risk," BCAM Working Papers 1902, Birkbeck Centre for Applied Macroeconomics.
    • Handle: RePEc:bbk:bbkcam:1902
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    File URL: https://eprints.bbk.ac.uk/28257/7/28257.pdf
    File Function: First version, 2019
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    More about this item

    Keywords

    Sovereign Risk; Optimal Monetary Policy; Fiscal Theory of the Price Level;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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