The dire effects of the lack of monetary and fiscal coordination

Journal Article (Journal Article)

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