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Optimal Monetary and Fiscal Policy in an Economy with Inflation Persistence

CEPR Discussion Paper No. DP10586

26 Pages Posted: 12 May 2015

See all articles by Paul Luk

Paul Luk

Hong Kong Institute for Monetary and Financial Research

David Vines

University of Oxford - Balliol College - Department of Economics; Australian National University (ANU); Centre for Economic Policy Research (CEPR)

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

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

Paul Luk (Contact Author)

Hong Kong Institute for Monetary and Financial Research ( email )

Hong Kong

David Vines

University of Oxford - Balliol College - Department of Economics ( email )

Manor Road
Oxford, OX1 3BJ, Oxfordshire OX13UQ
United Kingdom
+44 1865 271 067 (Phone)
+44 1865 271 094 (Fax)

Australian National University (ANU)

Canberra, Australian Capital Territory
Australia

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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