The dire effects of the lack of monetary and fiscal coordination


Journal Article

© 2018 Elsevier B.V. If the government's willingness to stabilize debt is waning, while the central bank is adamant about keeping inflation low, the economy enters a vicious spiral of higher inflation, monetary tightening, recession, and further debt accumulation. The mere possibility of this conflict represents a drag on the economy. A commitment to inflate away the debt accumulated during a large recession leads to welfare improvements and lower uncertainty by separating long-run fiscal sustainability from the short-run fiscal stimulus. This strategy can be used to avoid the zero lower bound. As a technical contribution, we explain how to build shock-specific policy rules.

Full Text

Duke Authors

Cited Authors

  • Bianchi, F; Melosi, L

Published Date

  • June 1, 2019

Published In

Volume / Issue

  • 104 /

Start / End Page

  • 1 - 22

International Standard Serial Number (ISSN)

  • 0304-3932

Digital Object Identifier (DOI)

  • 10.1016/j.jmoneco.2018.09.001

Citation Source

  • Scopus