The Optimal Coordination of Fiscal and Monetary Policy in a New Keynesian Framework
29 Pages Posted: 20 Oct 2015
Date Written: October 2015
Abstract
This paper studies the coordination of monetary and fiscal policy in a simple New Keynesian model. We show that, in such a setup and when the policymaker acts with commitment, it is optimal not to use fiscal policy to stabilise inflation. We illustrate this result using additively separable preferences and Greenwood-Hercowitz-Huffman (1988) preferences, and we discuss the intuition behind this result.
Keywords: fiscal policy, monetary policy, New Keynesian model
JEL Classification: E52, E61, E62
Suggested Citation: Suggested Citation
Luk, Paul and Vines, David, The Optimal Coordination of Fiscal and Monetary Policy in a New Keynesian Framework (October 2015). CEPR Discussion Paper No. DP10895, Available at SSRN: https://ssrn.com/abstract=2676601
Australian National University (ANU)
Canberra, Australian Capital Territory
Australia
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