Optimal Monetary and Fiscal Policy in an Economy with Inflation Persistence
26 Pages Posted: 12 May 2015
Date Written: May 2015
Abstract
This paper studies a simple New-Keynesian model of fiscal and monetary policy coordination when the policymaker acts under commitment. With a New Keynesian Phillips curve it is optimal to control inflation only through the use of monetary policy. But, when price-setters use a Steinsson (2003) Phillips curve, fiscal policy plays an active role, enabling a greater degree of consumption smoothing.
Keywords: fiscal policy, monetary policy, New Keynesian model, Phillips curve
JEL Classification: E4, E5, E6
Suggested Citation: Suggested Citation
Luk, Paul and Vines, David, Optimal Monetary and Fiscal Policy in an Economy with Inflation Persistence (May 2015). CEPR Discussion Paper No. DP10586, Available at SSRN: https://ssrn.com/abstract=2605021
Australian National University (ANU)
Canberra, Australian Capital Territory
Australia
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