Monetary and Fiscal Policy Coordination and Macroeconomic Stabilization. A Theoretical Analysis

Lambertini, Luca; Rovelli, Riccardo

doi:10.2139/ssrn.380322

Cited by 28 publications

(37 citation statements)

References 26 publications

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“…We consider strategic interaction between monetary and …scal authorities in a simple aggregate supply -aggregate demand model similar to the one in Dixit and Lambertini (2003) and Lambertini and Rovelli (2003) but extended to allow for a liquidity trap and the e¤ect of in ‡ationary expectations in the aggregate supply curve. Our perspective is ex-ante, i.e., we focus on the design of institutions, namely, the appropriate incentives for the Treasury and the Central Bank, prior to the occurrence of a liquidity trap (M1).…”

Section: Our Approach To Modeling a Liquidity Trapmentioning

confidence: 99%

“…We use an aggregate demand and supply framework that is similar to recent work on strategic monetary-…scal policy interaction, e.g., Ball (2005), Dixit and Lambertini (2003) and Lambertini and Rovelli (2003). The aggregate demand and supply equations are given by, respectively 17…”

Section: Aggregate Demand and Aggregate Supplymentioning

confidence: 99%

“…The third term captures the fact that the exercise of …scal policy is more costly 26 The microfoundations for this in Lambertini (2000, 2003) rest on the presence of monopolistic competition. Monopoly power in the product market reduces output below the e¢ cient level, hence, giving policy makers an incentive to raise output.…”

Section: Social Preferencesmentioning

confidence: 99%

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Optimal institutional design when there is a zero lower bound on interest rates

Dhami

al‐Nowaihi

2011

Oxford Economic Papers

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Given the recent experience, there is a growing interest in the liquidity trap; which occurs when the nominal interest rate reaches its zero lower bound. We outline the surprising policy recommendations when there is the possibility of a zero lower bound. Then, using the Dixit-Lambertini (2003) framework of strategic policy interaction between the Treasury and the Central Bank, we …nd that the optimal institutional response to the possibility of a liquidity trap has two main components. First, an optimal in ‡ation target is given to the Central Bank. Second, the Treasury, who retains control over …scal policy and acts as Stackelberg leader, is given optimal output and in ‡ation targets. This institutional solution achieves the optimal rational expectations pre-commitment solution.

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Section: Our Approach To Modeling a Liquidity Trapmentioning

confidence: 99%

Section: Aggregate Demand and Aggregate Supplymentioning

confidence: 99%

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Optimal institutional design when there is a zero lower bound on interest rates

Dhami

al‐Nowaihi

2011

Oxford Economic Papers

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“…Models of strategic monetary and …scal policy interaction have recently been given a new impetus by the work of Dixit and Lambertini (2003) and Lambertini and Rovelli (2003) (which, however, do not consider a liquidity trap). Issues of strategic interaction between policy makers assume even greater signi…cance during times of extreme recessions as the Japanese experience (J3 above) indicates.…”

Section: About Our Papermentioning

confidence: 99%

“…We would answer yes to the …rst two questions and 'ex-ante perspective'to the third. We consider strategic interaction between monetary and …scal authorities in a simple aggregate supply -aggregate demand model similar to the one in Dixit and Lambertini (2003) and Lambertini and Rovelli (2003) but extended to allow for a liquidity trap and the e¤ect of in ‡ationary expectations in the aggregate supply curve. There is some possibility that the economy will fall into a liquidity trap in some state of the world in the future.…”

Section: About Our Papermentioning

confidence: 99%

Alice through the Looking Glass: Strategic Monetary and Fiscal Policy Interaction in a Liquidity Trap

Dhami

al‐Nowaihi

2007

SSRN Journal

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The recent experience with low in ‡ation has reopened interest in the liquidity trap; which occurs when the nominal interest rate reaches its zero lower bound. To reduce the real interest rate, and to stimulate the economy, the modern literature highlights the role of high in ‡ationary expectations. Using the Dixit-Lambertini (2003) framework of strategic policy interaction, we …nd that the optimal institutional response to the possibility of a liquidity trap has two main components. First, an optimal in ‡ation target given to the Central Bank. Second, the Treasury, who retains control over …scal policy and acts as leader, is given optimal output and in ‡ation targets. This keeps in ‡ationary expectations su¢ ciently high and achieves the optimal rational expectations pre-commitment solution. Simulations show that this arrangement is (1) optimal even when the Treasury has no in ‡ation target but follow's the optimal output target and (2) 'near optimal' even when the Treasury follows its own agenda through a suboptimal output target but is willing to follow an optimal in ‡ation target. Finally, if monetary policy is delegated to an independent central bank with an optimal in ‡ation target, but the Treasury retains discretion over …scal policy, then the outcome can be a very poor one.

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Dynamic Modeling of Monetary and Fiscal Cooperation Among Nations

Plasmans

Engwerda

Aarle

et al. 2006

Dynamic Modeling and Econometrics in Economics and Finance

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The series will place particular focus on monographs, surveys, edited volumes, conference proceedings and handbooks on:• Nonlinear dynamic phenomena in economics and finance, including equilibrium, disequilibrium, optimizing and adaptive evolutionary points of view; nonlinear and complex dynamics in microeconomics, finance, macroeconomics and applied fields of economics.• Econometric and statistical methods for analysis of nonlinear processes in economics and finance, including computational methods, numerical tools and software to study nonlinear dependence, asymmetries, persistence of fluctuations, multiple equilibria, chaotic and bifurcation phenomena.• Applications linking theory and empirical analysis in areas such as macrodynamics, microdynamics, asset pricing, financial analysis and portfolio analysis, international economics, resource dynamics and environment, industrial organization and dynamics of technical change, labor economics, demographics, population dynamics, and game theory.The target audience of this series includes researchers at universities and research and policy institutions, students at graduate institutions, and practitioners in economics, finance and international economics in private or government institutions.

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Monetary and Fiscal Policy Coordination and Macroeconomic Stabilization. A Theoretical Analysis

Cited by 28 publications

References 26 publications

Optimal institutional design when there is a zero lower bound on interest rates

Optimal institutional design when there is a zero lower bound on interest rates

Alice through the Looking Glass: Strategic Monetary and Fiscal Policy Interaction in a Liquidity Trap

Dynamic Modeling of Monetary and Fiscal Cooperation Among Nations

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