Abstract:In the last few years papers have begun to analyse optimal monetary and fiscal policy in models incorporating nominal rigidities where social welfare is derived from the utility of agents. This article examines whether this analysis provides support for the consensus assignment, where monetary policy controls demand and inflation and fiscal policy controls government debt. We argue that the basic structure of New Keynesian models implies that monetary policy dominates fiscal policy as a means of controlling in… Show more
“…In fact, treating government expenditure as waste is an industry standard in the DSGE models, see Leeper (1991), and with numerous contributions such as Kirsanova et al (2009), Leith andWren-Lewis (2008), Schmitt-Grohe and Uribe (2007). An alternative is to place government expenditure directly in the utility function as a public good, cfr.…”
Section: Government Expenditure Modellingmentioning
a b s t r a c t a r t i c l e i n f oThe objective of this paper is to inquire the consequences of some simplifying assumptions typically made in the overlapping generations (OLG) models of pension systems and pension system reforms. This literature is largely driven by policy motivations and the alternative modelling choices are rarely discussed. On the other hand, the complexity of general equilibrium OLG modelling necessitates some simplifications in the model. We run a series of experiments in which the same reform in the same economy is modelled with six different sets of assumptions concerning the functional form of the utility function, time inconsistency, bequests' redistribution, labour supply decisions and internalization of the linkage between social security contributions and benefits in these decisions as well as public spending. We find that these assumptions significantly affect both the size and the sign of the macroeconomic and welfare measures of the policy effects with the order of magnitude comparable to the reform itself.
“…In fact, treating government expenditure as waste is an industry standard in the DSGE models, see Leeper (1991), and with numerous contributions such as Kirsanova et al (2009), Leith andWren-Lewis (2008), Schmitt-Grohe and Uribe (2007). An alternative is to place government expenditure directly in the utility function as a public good, cfr.…”
Section: Government Expenditure Modellingmentioning
a b s t r a c t a r t i c l e i n f oThe objective of this paper is to inquire the consequences of some simplifying assumptions typically made in the overlapping generations (OLG) models of pension systems and pension system reforms. This literature is largely driven by policy motivations and the alternative modelling choices are rarely discussed. On the other hand, the complexity of general equilibrium OLG modelling necessitates some simplifications in the model. We run a series of experiments in which the same reform in the same economy is modelled with six different sets of assumptions concerning the functional form of the utility function, time inconsistency, bequests' redistribution, labour supply decisions and internalization of the linkage between social security contributions and benefits in these decisions as well as public spending. We find that these assumptions significantly affect both the size and the sign of the macroeconomic and welfare measures of the policy effects with the order of magnitude comparable to the reform itself.
“…By contrast, drawing on the so‐called Ricardian equivalence theory and controversial interpretations of historical evidence, fiscal policy is limited to the control and sustainability of public finances. This had led to a so‐called “consensus assignment” on the interaction between monetary and fiscal policies: The consensus assignment from the title refers to the idea that monetary policy (in a closed economy, or a small open economy with flexible exchange rates) should normally focus on business cycle stabilisation and inflation control, while fiscal policy (at the macro level) should focus on the control of government debt or deficits (Kirsanova & Wren‐Lewis, , F482).…”
Section: The Ncm Theory and Policy Implicationsmentioning
confidence: 99%
“…The consensus assignment from the title refers to the idea that monetary policy (in a closed economy, or a small open economy with flexible exchange rates) should normally focus on business cycle stabilisation and inflation control, while fiscal policy (at the macro level) should focus on the control of government debt or deficits (Kirsanova & Wren‐Lewis, , F482).…”
Section: The Ncm Theory and Policy Implicationsmentioning
Drawing on the contributions of Augusto Graziani to the so‐called monetary theory of production, this article aims to show that an accommodative monetary policy—as defended in the new consensus macroeconomics theory and supported by current practice around the world—has the maximum effect in stimulating aggregate demand and income when it is implemented in conjunction with a coordinated discretionary fiscal policy that boosts the demand for and the supply of loans via the reduction of the liquidity risk and the insolvency risk. As a result, the potentially beneficial effects of the traditional Keynesian fiscal multiplier are significantly amplified.
“…Kirsanova et al . () argue that prior to the Great Recession, there was a widespread consensus as to the respective roles of monetary and fiscal policy. Monetary policy was assigned to the control of inflation and the stabilization of demand, while the objective of fiscal policy was reasonably stable tax rates, consistent with the control of government debt, broadly in line with the conclusions of Section 2.…”
Section: Fiscal Policy When Monetary Policy Is Constrainedmentioning
Theory suggests that government should smooth taxes and spending, and adjustments in the level of debt should be gradual. Fiscal rules should therefore relate to deficits rather than debt. Rules should also reflect constraints on monetary policy. In normal times, rules should reflect political and institutional considerations, such as the potential for ‘deficit bias’, and the effectiveness of any fiscal council. For example, governments without a history of bias might target deficits five years ahead. However, if interest rates hit the zero lower bound, fiscal and monetary policy coordination is required, and here fiscal councils can also have an important role.
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