Monetary-Fiscal Interactions and the Euro Area's Malaise
46 Pages Posted: 12 Jun 2017
Date Written: June 9, 2017
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: Suggested Citation