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Title: The Optimal Coordination of Fiscal and Monetary Policy in a New Keynesian Framework

Author(s): Paul Luk and David Vines

Publication Date: October 2015

Keyword(s): fiscal policy, monetary policy and New Keynesian model

Programme Area(s): Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Luk, P and Vines, D. 2015. 'The Optimal Coordination of Fiscal and Monetary Policy in a New Keynesian Framework'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10895