Monetary and Fiscal Policy Coordination when Bonds Provide Transactions Services

41 Pages Posted: 12 Jun 2008

See all articles by Matthew B. Canzoneri

Matthew B. Canzoneri

Georgetown University

Robert E. Cumby

Georgetown University - Department of Economics; National Bureau of Economic Research (NBER)

Behzad Diba

Georgetown University

J. David López-Salido

Board of Governors of the Federal Reserve System

Date Written: May 2008

Abstract

It is commonly asserted that monetary and fiscal policy may have to be coordinated if they are to provide a nominal anchor and avoid the pathological outcomes of sunspots or explosive price paths. In this paper, we study a model in which government bonds are an imperfect substitute for money in the transactions technology, providing a new channel for debt dynamics to feed into inflation dynamics. This modification of an otherwise standard NNS model substantially alters the conditions for local determinacy and the requirements for macroeconomic policy coordination: the Taylor Principle is no longer sacrosanct; a weak fiscal response to debt is no longer the panacea for a weak monetary policy; sunspot equilibria may be less relevant than previously thought; and the need for coordination may be less than previously thought. In addition, our model provides a new way of thinking about the structural break that is thought to have occurred around 1980 in monetary policy and in the dynamics of government spending and private consumption.

Keywords: Bonds, Monetary and Fiscal Policies, Transaction Services

JEL Classification: E51, E52

Suggested Citation

Canzoneri, Matthew B. and Cumby, Robert E. and Diba, Bezhad and López-Salido, J. David, Monetary and Fiscal Policy Coordination when Bonds Provide Transactions Services (May 2008). , Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1143177

Matthew B. Canzoneri (Contact Author)

Georgetown University ( email )

Washington, DC 20057
United States
202-687-5911 (Phone)
202-687-6102 (Fax)

Robert E. Cumby

Georgetown University - Department of Economics ( email )

580 Intercultural Center
Washington, DC 20057
United States
202-687-2990 (Phone)
202-687-6102 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Bezhad Diba

Georgetown University ( email )

Washington, DC 20057
United States
2026875682 (Phone)
2026876102 (Fax)

HOME PAGE: http://econ.georgetown.edu/

J. David López-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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