DP10586 Optimal Monetary and Fiscal Policy in an Economy with Inflation Persistence
|Author(s):||Paul Luk, David Vines|
|Publication Date:||May 2015|
|Keyword(s):||fiscal policy, monetary policy, New Keynesian model, Phillips curve|
|JEL(s):||E4, E5, E6|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=10586|
This paper studies a simple New-Keynesian model of fiscal and monetary policy coordination when the policymaker acts under commitment. With a New Keynesian Phillips curve it is optimal to control inflation only through the use of monetary policy. But, when price-setters use a Steinsson (2003) Phillips curve, fiscal policy plays an active role, enabling a greater degree of consumption smoothing.