Interactions of Monetary and Fiscal Policy Via Open Market Operations

21 Pages Posted: 20 Jun 2004

See all articles by Andreas Schabert

Andreas Schabert

University of Cologne - Department of Economics; University of Dortmund; University of Amsterdam - Faculty of Economics and Business

Abstract

We examine interactions of monetary and fiscal policy in a sticky price model where public debt is non-neutral, as it provides transaction services. This property is brought about by a legal restriction on open market operations by which only government bonds are eligible. Debt creation eases access to money and can therefore induce households to increase purchases of goods. Government expenditures, which are not completely tax financed, and deficit financed tax cuts then tend to stimulate private consumption. However, for these fiscal impulses to raise real activity monetary policy should not too aggressively aim at stabilising the economy.

Suggested Citation

Schabert, Andreas, Interactions of Monetary and Fiscal Policy Via Open Market Operations. Economic Journal, Vol. 114, No. 494, pp. C186-C206, March 2004. Available at SSRN: https://ssrn.com/abstract=547510

Andreas Schabert (Contact Author)

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

University of Dortmund ( email )

Vogelpothsweg 87
Dortmund, 44227
Germany
+49 231 755 3288 (Phone)

University of Amsterdam - Faculty of Economics and Business ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

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