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Discussion Paper Details

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Title: Monetary-Fiscal Interactions and the Euro Area's Malaise

Author(s): Marek Jarocinski and Bartosz Adam Mackowiak

Publication Date: May 2017

Keyword(s): fiscal theory of the price level, eurobond, Fiscal theory of the price level, self-fullfiling expectations and zero lower bound

Programme Area(s): Monetary Economics and Fluctuations

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12020

Bibliographic Reference

Jarocinski, M and Mackowiak, B. 2017. 'Monetary-Fiscal Interactions and the Euro Area's Malaise'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12020