Strategic Monetary–Fiscal Interactions in a Downturn

19 Pages Posted: 5 Jun 2015

See all articles by Jan Libich

Jan Libich

La Trobe University - Business School

Dat Thanh Nguyen

La Trobe University

Date Written: June 2015

Abstract

Highly diverse responses of monetary and fiscal policies have been observed around the world in the post global financial crisis period of 2010–2014. While some countries implemented various mixes of monetary and/or fiscal stimuli, others have seen austerity. Our paper explores whether the strategic interaction between the central bank and government can shed some light on this diversity, and what lessons about the institutional design of the two policies can be learnt from it. This is done by mapping a reduced‐form New Keynesian model into a generalised game‐theoretic framework with deterministic and stochastic revisions of policy actions. Our focus is on the short‐term policy interaction regarding stabilisation of an adverse shock (rather than long‐term issues related to fiscal sustainability and unpleasant monetarist arithmetic). Particular attention is paid to the effect of institutional and structural features such as inflation targeting, monetary and fiscal implementation lags, and the policies’ leadership.

Suggested Citation

Libich, Jan and Nguyen, Dat Thanh, Strategic Monetary–Fiscal Interactions in a Downturn (June 2015). Economic Record, Vol. 91, Issue 293, pp. 172-190, 2015, Available at SSRN: https://ssrn.com/abstract=2614714 or http://dx.doi.org/10.1111/1475-4932.12182

Jan Libich (Contact Author)

La Trobe University - Business School ( email )

La Trobe University
Bundoora, Victoria, Victoria 3083
Australia

Dat Thanh Nguyen

La Trobe University

Department of Economics and Finance
Victoria 3552, 3086
Australia

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