Discussion paper

DP10895 The Optimal Coordination of Fiscal and Monetary Policy in a New Keynesian Framework

This paper studies the coordination of monetary and fiscal policy in a simple New Keynesian model. We show that, in such a setup and when the policymaker acts with commitment, it is optimal not to use fiscal policy to stabilise inflation. We illustrate this result using additively separable preferences and Greenwood-Hercowitz-Huffman (1988) preferences, and we discuss the intuition behind this result.

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Citation

Vines, D (2015), “DP10895 The Optimal Coordination of Fiscal and Monetary Policy in a New Keynesian Framework”, CEPR Press Discussion Paper No. 10895. https://new.cepr.org/publications/dp10895