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.