The dire effects of the lack of monetary and fiscal coordination

Arbeitspapier

What happens if the government's willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue of long-run fiscal sustainability from the need for short-run fiscal stabilization. This strategy can also be used to rule out episodes in which the central bank becomes constrained by the zero lower bound.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2017-19

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Monetary Policy ; Fiscal Policy ; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy ; Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
• Subject: Monetary and fiscal policies ; coordination ; emergency budget ; Markov-switching models ; liquidity traps ; Geldpolitik ; Finanzpolitik ; Stabilisierungspolitik ; Wirkungsanalyse ; Konjunktur ; Inflation ; Niedrigzinspolitik

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bianchi, Francesco ; Melosi, Leonardo
• Event: Veröffentlichung
• (who): Federal Reserve Bank of Chicago
• (where): Chicago, IL
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/200563