Inflation's Role in Optimal Monetary-Fiscal Policy

Leeper, Eric M.; Zhou, Xuan

doi:10.3386/w19686

“…This paper is somewhat integrative. Thinking about monetary policy within the fiscal theory of the price level occurs scattered about in many sources, including my own, Cochrane (1998Cochrane ( , 2005Cochrane ( , 2011bCochrane ( , 2014Cochrane ( , 2017a, as well as Leeper and Leith (2016), (see especially figure 6, with the stepping on a rake pattern) Leeper and Walker (2013), Leeper and Zhou (2013), Leeper (2016), Jacobson, Leeper and Preston (2017), other Sims papers, and those of other authors. The main novelty here is to integrate interest rate targets with long-term debt, to integrate interest rate targets and quantity operations, and to see how long-term debt creates a negative sign.…”

Section: Limits and Literaturementioning

confidence: 99%

Stepping on a Rake: the Fiscal Theory of Monetary Policy

Cochrane

¹

2016

View full text Add to dashboard Cite

The fiscal theory of the price level can describe monetary policy. Governments can set interest rate targets and thereby affect inflation, with no change in fiscal surpluses. The same basic mechanism describes interest rate targets, forward guidance, open market operations, and quantitative easing. It does not require any monetary, pricing, or other frictions. In the presence of long-term debt, higher interest rates lead to temporarily lower inflation, a challenging sign. I derive and replicate the results of the Sims (2011) "stepping on a rake" model, which first produced this negative sign, and produces realistic impulse-response functions. I show that Sims' result is robust to many model features, but essentially requires long-term debt.

show abstract

“…4 There are recent models that examine the impact of monetary policy in the presence of longterm government bonds. Leeper and Zhou (2013) analyze optimal monetary (and …scal) policy with ‡exible prices, while Bhattarai et al (2013) consider a New Keynesian environment at ZLB. These papers, however, do not allow for the possibility of sovereign default.…”

Section: Introductionmentioning

confidence: 99%

Self-Fulfilling Debt Crises: Can Monetary Policy Really Help?

Bacchetta¹,

Perazzi²,

Wincoop³

2015

View full text Add to dashboard Cite

We would like to thank Luca Dedola, Kenza Benhima, Celine Poilly, and seminar participants at the University of Lausanne, ETH Zurich, and participants at the ECB conference "Nonlinearities in macroeconomics and finance in light off crises" and the UVA-Richmond Fed research conference for helpful comments and suggestions. We gratefully acknowledge financial support from the Bankard Fund for Political Economy and the ERC Advanced Grant #269573. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

show abstract

“…This paper is somewhat integrative. Thinking about monetary policy within the fiscal theory of the price level occurs scattered about in many sources, including my own, Cochrane (1998Cochrane ( , 2005Cochrane ( , 2011bCochrane ( , 2014Cochrane ( , 2017a, as well as Leeper and Leith (2016), (see especially figure 6, with the stepping on a rake pattern) Leeper and Walker (2013), Leeper and Zhou (2013), Leeper (2016), Jacobson, Leeper and Preston (2017), other Sims papers, and those of other authors. The main novelty here is to integrate interest rate targets with long-term debt, to integrate interest rate targets and quantity operations, and to see how long-term debt creates a negative sign.…”

Section: Limits and Literaturementioning

confidence: 99%