DP10895 The Optimal Coordination of Fiscal and Monetary Policy in a New Keynesian Framework
|Author(s):||Paul Luk, David Vines|
|Publication Date:||October 2015|
|Keyword(s):||fiscal policy, monetary policy, New Keynesian model|
|JEL(s):||E52, E61, E62|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=10895|
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.