Monetary exit and fiscal spillovers

Abstract

The aftermath of the Global …nancial crisis has seen two types of monetary policy concerns. Some economists (e.g. Paul Krugman) worry primarily about possible de‡ation caused by a secular stagnation. In contrast, others (e.g. John Taylor) worry about excessively high in ‡ation caused by quantitative easing and monetization of …scal imbalances. We show that some countries should fear both -de ‡ation in the short term and high in ‡ation in the long term -whereas some countries are unlikely to experience either. This is done in a game theoretic framework with dynamic leadership (stochastic revisions of actions). Such framework enables us to examine strategic monetary-…scal interactions as well as policymakers'incomplete information about the economic recovery (such as during 2010-2014). Our empirical section then quanti…es indices of monetary and …scal leadership for high-income countries to assess their de ‡ationary/in ‡ationary prospects. It is shown, for example, that undesirable departures from price stability, both in the short term and long term, are much more likely in the United States and Japan than in Australia or New Zealand.

Monetary Consequences of Fiscal Stress in a Game Theoretic Framework

“…First, this paper extends the literature on the strategic aspect of monetary and fiscal interaction. Despite the broad and growing literature about the fiscal and monetary interaction, a very few of them addresses the implications of ageing population problem, exceptions include Leeper and Walker (2011) and Libich, Nguyen and Stehlik (2015). While the first study only discusses the consequences the fiscal spillover on monetary policy, the second one analyses the ageing population as a possible scenario in the aftermath of the global financial crisis and assumes that the policy interaction is a conflict game, namely Game of Chicken.…”

Strategic Monetary–Fiscal Interactions in a Downturn

“…The link between the short‐run and long‐run perspective is explored in Libich et al . (), but only at the game‐theoretic level without an underlying macroeconomic model, which makes it impossible to link the results back to the structural and policy parameters as we attempt here.…”

“…The alternative scenario in which each policy‐maker prefers the other policy to carry out the required stimulus may also be relevant under some circumstances (see Libich et al ., ).…”

Unpleasant Monetarist Arithmetic: Macroprudential Edition

“…,Leeper and Leith (2016),Libich et al (2015),Blake and Kirsanova (2011), andFragetta and Kirsanova (2010). Adding fiscal policy would make our agenda even more in line with the recently established Trinity network at Princeton University (operating under the auspices of several major central banks), coordinated by leading scholars Markus Brunnermeier and Eric Leeper.…”