Generalizing Determinacy under Monetary and Fiscal Policy Switches: The Case of the Zero Lower Bound

41 Pages Posted: 7 Sep 2019 Last revised: 2 Nov 2020

See all articles by Seonghoon Cho

Seonghoon Cho

School of Economics, Yonsei University

Antonio Moreno

School of Economics and Business, University of Navarra

Date Written: October 15, 2020

Abstract

In a fixed-regime setting, it is known since Leeper (1991) that both monetary dominance (mix of active monetary and passive fiscal policies) and fiscal dominance (mix of active fiscal and passive monetary policy) regimes yield a determinate unique equilibrium. This paper shows that in a regime-switching context, switches from monetary dominance to fiscal dominance regimes (and vice-versa) render the overall economy indeterminate. We apply our results to the important case of the exit from the zero lower bound (ZLB), where monetary policy is inherently passive. Contrary to the fixed regime prediction, the economy switching between the ZLB in a fiscally led regime and a monetary dominance regime is robustly indeterminate, making the coordination of agents' beliefs hard because both monetary and fiscal policies are overall strongly passive.

Keywords: Regime-Switching, Zero Lower Bound, Determinacy, Fiscal Policy, Discount Factor

JEL Classification: C62, D84, E31, E32, E42, E52, E58, E62, E63

Suggested Citation

Cho, Seonghoon and Moreno, Antonio, Generalizing Determinacy under Monetary and Fiscal Policy Switches: The Case of the Zero Lower Bound (October 15, 2020). Available at SSRN: https://ssrn.com/abstract=3447189 or http://dx.doi.org/10.2139/ssrn.3447189

Seonghoon Cho (Contact Author)

School of Economics, Yonsei University ( email )

Yonsei University
Seoul
Korea
82-2-2123-2470 (Phone)
82-2-393-1158 (Fax)

HOME PAGE: http://web.yonsei.ac.kr/sc719/index.htm

Antonio Moreno

School of Economics and Business, University of Navarra ( email )

Ed. Amigos
Pamplona, Navarra 31009
Spain

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
58
Abstract Views
664
rank
412,706
PlumX Metrics