Monetary and Fiscal Policy in Times of Crises: A New Keynesian Perspective in Continuous Time

Abstract

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The Dance of Two Instruments: How Fiscal and Monetary Policy Interact in Nigeria

“…Supply-side shocks also caused total spending to respond adversely, and a contractionary budgetary policy was pursued. Therefore, It is believed that the outcome overlapped the conclusion that the nature of the interaction between both policies is substitute in nature this result can be seen in [18,19,67] which are thought to have shown that a shock that was experienced in the economy leads to a policy conflict.…”

“…The coordination of fiscal and monetary strategies in Nigeria is by the government through the Federal Ministry of Finance and the Central Bank of Nigeria, respectively [11]. The relationship between monetary and fiscal policies remains a major point of contention in the literature as studies have revealed that fiscal and monetary policies can interact as substantial complement between both policies, that is expansionary measures in one policy are reinforced by those in the other [12,[13][14][15][16][17], other studies revealed that fiscal and monetary policies can also interact in a substitutive manner between both policies, that is expansionary measures in one policy are reinforced by contractionary measure in the other policy [18,19], although, the coordination between fiscal and monetary policies varies across countries and depends on their economic, political, and social situations [20]. However, the extent of their reliance, independence, and interdependencies determine whether the economy moves closer to or further away from predefined goals and targets [21,[22][23][24][25][26].…”

Fiscal and Monetary Policies Interactions in Nigeria and South Africa: Dynamic Stochastic General Equilibrium Approach

“…Their empirical clarification reaffirms the role of policy timing in affecting inflation. Hayo and Niehof (2014) developed a DSGE model in an open economy with monetary and fiscal policy in a continuous time framework to analyze the interdependence between the two policies during financial crises. They analyzed the contagious effects on bond markets and real markets under different types of monetary and fiscal policies.…”

Management of fiscal and monetary policies interdependence in South African economy: A Bayesian VAR approach

“…The study concludes that a tax reduction would be more potent during the liquidity trap than when there is no liquidity trap. Following the thoughts of Hayo and Niehof (2014) on the role of monetary and fiscal policy in fighting recessions or economic crises, Valdivia and Valdivia (2019) investigated the effectiveness of fiscal and monetary policy coordination during the 2007-2010 global crisis using a DSGE model. The results show that fiscal and monetary policies shocks have unfavourable impacts on price stability and economic growth during a crisis.…”

“…Consequently, the fiscal authority is assumed to be good, and slashes in taxes funded by upsurges in debt level are recompensed by a surge in taxation at the latter date to ensure debt creditworthiness. Under this arrangement, the dispute on the coordination between the fiscal and monetary policies was said to be pointless (Hayo & Niehof, 2014). The customary duty of the central bank is to regulate price levels.…”