Citation

Discussion Paper Details

Please find the details for DP12164 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: The Dire Effects of the Lack of Monetary and Fiscal Coordination

Author(s): Francesco Bianchi and Leonardo Melosi

Publication Date: July 2017

Keyword(s): coordination, emergency budget, liquidity traps, Markov-switching models and Monetary and ?scal policies

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: What happens if the government's willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue of long-run fiscal sustainability from the need for short-run fiscal stabilization. This strategy can also be used to rule out episodes in which the central bank becomes constrained by the zero lower bound.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12164

Bibliographic Reference

Bianchi, F and Melosi, L. 2017. 'The Dire Effects of the Lack of Monetary and Fiscal Coordination'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12164