Monetary-Fiscal Interactions and the Euro Area's Malaise

46 Pages Posted: 12 Jun 2017

See all articles by Marek Jarocinski

Marek Jarocinski

European Central Bank (ECB)

Bartosz Maćkowiak

European Central Bank (ECB)

Multiple version iconThere are 3 versions of this paper

Date Written: June 9, 2017

Abstract

When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. We specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB's objective.

Keywords: self-fulfilling expectations, zero lower bound, fiscal theory of the price level

JEL Classification: E31, E32, E63

Suggested Citation

Jarocinski, Marek and Maćkowiak, Bartosz, Monetary-Fiscal Interactions and the Euro Area's Malaise (June 9, 2017). ECB Working Paper No. 2072. Available at SSRN: https://ssrn.com/abstract=2984919 or http://dx.doi.org/10.2139/ssrn.2984919

Marek Jarocinski (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6414 (Phone)

Bartosz Maćkowiak

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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