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.