Monetary Conservatism and Fiscal Policy

Adam, Klaus; Billi, Roberto M.

doi:10.2139/ssrn.962112

Cited by 40 publications

(78 citation statements)

References 25 publications

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“…In the full model analyzed in Section 3, we allow for positive steady-state government debt, and hence a role for time-varying debt service costs. Adam and Billi 2008;Eggertsson 2008) by assuming that the liquidity trap is caused by an adverse preference shock that sharply depresses the potential real interest rate r t pot . Because this type of shock does not imply a tradeoff between stabilizing inflation and the output gap, our assumed highly aggressive monetary policy reaction function would keep both inflation at target and output at potential if unconstrained by the zero lower bound.…”

Section: Impulse Responses To a Rise In Government Spendingmentioning

confidence: 99%

Is There a Fiscal Free Lunch in a Liquidity Trap?

Erceg

Lindé

2014

Journal of the European Economic Association

177

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In this paper, we use a dynamic stochastic general equilibrium model to examine the effects of an expansion in government spending in a liquidity trap. If the liquidity trap is very prolonged, the spending multiplier can be much larger than in normal circumstances, and the budgetary costs minimal. However, given this fiscal free lunch, it is unclear why policymakers would want to limit the size of fiscal expansion. Our paper addresses this question in a model environment in which the duration of the liquidity trap is determined endogenously, and depends on the size of the fiscal stimulus. We show that even if the multiplier is high for small increases in government spending, it may decrease substantially at higher spending levels; thus, it is crucial to distinguish between the marginal and average responses of output and government debt.

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Section: Impulse Responses To a Rise In Government Spendingmentioning

confidence: 99%

Is There a Fiscal Free Lunch in a Liquidity Trap?

Erceg

Lindé

2014

Journal of the European Economic Association

177

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“…Our contribution is closely related to Adam and Billi (2008) and Dixit and Lambertini (2003). The former consider the case of independent monetary and fiscal policymakers both acting under discretion and discuss the desirability of installing a conservative central banker, as suggested by Rogoff (1985), in order to eliminate the steady-state biases associated with discretion.…”

Section: Monetary Commitment and Fiscal Discretionmentioning

confidence: 57%

“…The former consider the case of independent monetary and fiscal policymakers both acting under discretion and discuss the desirability of installing a conservative central banker, as suggested by Rogoff (1985), in order to eliminate the steady-state biases associated with discretion. Adam and Billi (2008) also compute the steady-state of a deterministic model with steady-state distortions, where the central bank acts under commitment and fiscal policy acts under discretion. However, they restrict to a steady-state analysis.…”

Section: Monetary Commitment and Fiscal Discretionmentioning

confidence: 99%

“…In fact, the central bank could still condition the nominal interest rate on f t−1 . Different is the case of sequential policy making, as in Adam and Billi (2008), where the timing also determines the leadership structure, because of lack of commitment on both the monetary and the fiscal side. gnocchi: Monetary coMMitMent and Fiscal discretion outcomes ( h tY ; σ) that are continuation competitive equilibria; (ii ) for any σ r , σ f * maximizes W t at any history h tF , given the continuation σ f * t+1…”

Section: A the Policy Gamementioning

confidence: 99%

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Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix

Gnocchi

2013

American Economic Journal: Macroeconomics

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We study a noncooperative policy game between monetary and fiscal policy, where only monetary policy can commit to future actions. The equilibrium outcome of the game depends on the strategies available to the monetary policymaker. If strategies are left unrestricted, the central bank can alter the incentives of the fiscal authority in a way that replicates the full commitment solution. If the central bank cannot commit to respond to fiscal policy, the fiscal authority generates fluctuations in government expenditure that undermine the stabilization goals of the central bank. (JEL E12, E23, E31, E52, E58, E62)

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“…If, however, h F [ h F this is no longer the case. 18 For important contributions on the effect of a conservative central banker, see also Blake and Kirsanova (2011) and Adam and Billi (2008). and analogously for F's payoffs.…”

Section: (Iv) Stochastic Revisionsmentioning

confidence: 99%

Strategic Monetary–Fiscal Interactions in a Downturn

Libich

Nguyen

2015

Economic Record

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Highly diverse responses of monetary and fiscal policies have been observed around the world in the post global financial crisis period of 2010-2014. While some countries implemented various mixes of monetary and/or fiscal stimuli, others have seen austerity. Our paper explores whether the strategic interaction between the central bank and government can shed some light on this diversity, and what lessons about the institutional design of the two policies can be learnt from it. This is done by mapping a reduced-form New Keynesian model into a generalised game-theoretic framework with deterministic and stochastic revisions of policy actions. Our focus is on the short-term policy interaction regarding stabilisation of an adverse shock (rather than long-term issues related to fiscal sustainability and unpleasant monetarist arithmetic). Particular attention is paid to the effect of institutional and structural features such as inflation targeting, monetary and fiscal implementation lags, and the policies' leadership. I IntroductionThe aftermath of the global financial crisis has seen a variety of monetary and fiscal policy mixes across the globe. Ranging from fiscal stimulus to austerity measures to quantitative easing, policy-makers in governments and central banks have used a number of different economic recipes. In an attempt to understand this plurality and provide novel insights and policy recommendations, this paper examines monetary-fiscal interactions following a major adverse shock.Our focus is on the strategic aspect of the monetary/fiscal responses to the shock. This is because the literature is scarce on this point, with most papers assuming that the two policies are able and willing to perfectly coordinate their actions. The 2010-2014 period has, however, shown us that this is not necessarily the case. For example, while central banks have attempted to lower long-term yields via quantitative easing, governments have tended to issue long-term rather than short-term bonds, and thus sabotage the central banks' stimulatory efforts. 1

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Monetary Conservatism and Fiscal Policy

Abstract: In 2006 all ECB publications will feature a motif taken from the €5 banknote.

Cited by 40 publications

References 25 publications

Is There a Fiscal Free Lunch in a Liquidity Trap?

Is There a Fiscal Free Lunch in a Liquidity Trap?

Monetary Commitment and Fiscal Discretion: The Optimal Policy Mix

Strategic Monetary–Fiscal Interactions in a Downturn

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