The fiscal theory of the price level (FTPL) describes fiscal and monetary policy rules such that the price level is determined by government debt and fiscal policy alone, with monetary policy playing at best an indirect role. This theory clashes with the monetarist view that states that money supply is the primary determinant of the price level and inflation. Furthermore, many authors have argu...

Delegating monetary policy to an independent central bank will not incur coordination problems with fiscal policy. The fiscal authority faces no incentive to try and expand the economy, as its efforts will be quickly countered by a contractionary monetary policy to maintain the inflation target. We argue that this proposition is not true in an open economy. When the external sector is added to ...

This paper examines monetary and fiscal policy through the estimation of a New-Keynesian dynamic general equilibrium model for Iran’s economy. In this New-Keynesian dynamic general equilibrium model, the consumers encounter the liquidity constraint and the firms face sticky prices, while they are changing them. In the model presented, a role is considered for both government spending and taxati...

This session of the conference is titled: “Fiscal Policy in a Monetary Union”. What is a central banker’s role in such a discussion? Well, Mervyn King once said: “Central banks are often accused of being obsessed with inflation. This is untrue. If they are obsessed with anything, it is with fiscal policy.” As so often, Mervyn King was right, we central bankers are indeed obsessed with fiscal po...

A burgeoning part of the monetary policy design literature posits that optimal monetary policy is the solution to a constrained optimization problem where the monetary authority has the discretion to minimize a social welfare function, taking the economy and other policies as given. In their paper “Is Optimal Monetary Policy Always Optimal?” Troy Davig and Refet Gurkaynak (henceforth, DG) argue...

Flexible inflation targeting has been advocated as a practical approach to the implementation of an optimal state-contingent monetary policy, but theoretical expositions reaching this conclusion have typically abstracted from the fiscal consequences of monetary policy. Here we extend the standard theory by considering the character of optimal monetary policy under a variety of assumptions about...

Control on regional government budgets is important in a monetary union as lower tiers of government have fewer incentives to consolidate debt. According to the Fiscal Theory of the Price Level; unsustainable non-Ricardian fiscal policies eventually force monetary policy to adjust. Hence, uncoordinated and non-regulated regional fiscal policies would therefore threaten price stability for the m...

This paper studies how the effects of monetary and fiscal policy vary depending on business cycle phase. It shows that in a medium-scale DSGE model, estimated US data, has stronger impact economy downturns booms. Labor capital income taxes display similar patterns. Government expenditure shocks consumption tax shocks, contrary, have output depressions recoveries. The also accounting for source ...

In an open economy with a floaLing exchange rate, the efficacy of fiscal and monetary policy depends fundamentally on the wage-setting pnxiess. In the canonical models of Mundell and Fleming, monetary expansion raises output via an exchange rate depreciation, while fiscal expansion has no output effect. These results hold only when real wages can be altered by exchange rate movements; if the re...