Monetary and fiscal policy interactions in a frictional model of fiat money, nominal public debt and banking

2021 ◽  
pp. 103861
Author(s):  
Saroj Dhital ◽  
Pedro Gomis-Porqueras ◽  
Joseph H. Haslag
Keyword(s):  
Fiscal Policy ◽  
Public Debt ◽  
Policy Interactions ◽  
Fiat Money ◽  
Monetary And Fiscal Policy

scholarly journals DESIGNING MONETARY AND FISCAL POLICY RULES IN A NEW KEYNESIAN MODEL WITH RULE-OF-THUMB CONSUMERS

2012 ◽  
Vol 18 (2) ◽  
pp. 395-417 ◽  
Author(s):  
Raffaele Rossi
Keyword(s):  
Steady State ◽  
Fiscal Policy ◽  
Public Debt ◽  
New Keynesian ◽  
Ricardian Equivalence ◽  
New Keynesian Model ◽  
Policy Rules ◽  
Rule Of Thumb ◽  
Keynesian Model ◽  
Monetary And Fiscal Policy

This paper studies the determinacy properties of monetary and fiscal policy rules in a small-scale New Keynesian model. We modify the standard model in two ways. First, we allow positive public debt in the steady state as in Leeper [Journal of Monetary Economics 27, 129–147 (1991)]. Second, we add rule-of-thumb consumers as in Bilbiie [Journal of Economic Theory 140, 162–196 (2008)]. Leeper studied a model in which Ricardian equivalence holds, and he showed that monetary and fiscal policy can be studied independently. In Bilbiie's analysis, rule-of-thumb consumers break the Ricardian equivalence and generate important consequences for the design of monetary policy. In his model, steady-state public debt was equal to zero. We study a model with both rule-of-thumb consumers and positive steady-state public debt. We find that the mix of fiscal and monetary policies that guarantees equilibrium determinacy is sensitive to the exact values of the parameters of the model.

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