Monetary and Fiscal Policy Interaction: The Current Consensus Assignment in the Light of Recent Developments

26 Pages Posted: 8 Aug 2010

See all articles by Tatiana Kirsanova

Tatiana Kirsanova

University of Glasgow

Campbell Leith

University of Glasgow - Department of Economics

Simon Wren-Lewis

University of Oxford - Economics Department

Date Written: August 6, 2010

Abstract

The last few years papers have begun to analyse optimal monetary and fiscal policy in models incorporating nominal rigidities where social welfare is derived from the utility of agents. This paper examines whether this analysis provides support for the consensus assignment, where monetary policy controls demand and inflation, and fiscal policy controls government debt. We argue that the basic structure of New Keynesian models implies that monetary policy dominates fiscal policy as a means of controlling inflation. No similar dominance appears to operate for fiscal policy and debt, if debt has to return to its initial level after shocks.

Keywords: Monetary and Fiscal Policy Interactions

JEL Classification: E52, E61, E62, E63

Suggested Citation

Kirsanova, Tatiana and Leith, Campbell and Wren-Lewis, Simon J.Q., Monetary and Fiscal Policy Interaction: The Current Consensus Assignment in the Light of Recent Developments (August 6, 2010). Available at SSRN: https://ssrn.com/abstract=1654359 or http://dx.doi.org/10.2139/ssrn.1654359

Tatiana Kirsanova

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Campbell Leith

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom
++44 141 330 3702 (Phone)
++44 141 330 4940 (Fax)

Simon J.Q. Wren-Lewis (Contact Author)

University of Oxford - Economics Department ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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