This paper explores the constraints imposed by expectations formation on the effectiveness of stabilization policy. Agents have incomplete information about the economic environment and form beliefs by extrapolating from observed patterns in historical data. Regimes with Ricardian fiscal policy (as in the standard account of monetary policy design) and also non-Ricardian fiscal policy are consi...

The objective of this study is to verify the dynamics between fiscal policy, measured by public debt, and monetary policy, measured by a reaction function of a central bank. Changes in monetary policies due to deviations from their targets always generate fiscal impacts. We examine two policy reaction functions: the first related to inflation targets and the second related to economic growth ta...

Recent work on optimal policy in sticky price models suggests that demand management through fiscal policy adds little to optimal monetary policy. We explore this consensus assignment in an economy subject to ‘deep’ habits at the level of individual goods where the counter-cyclicality of mark-ups this implies can result in government spending crowding-in private consumption in the short run. We...

the purpose of this paper is to examine the effects of monetary, fiscal and oil revenue shocks on macroeconomic variables in the framework of rule and discretionary monetary policy. to end this, we use a new keynesian dynamic stochastic general equilibrium (dsge) model. given the dominant role of oil in the country, we consider the role of oil shock in the model through different channels. the ...

This paper is concerned with the saddle-path stability of monetary growth rules in a two-country two-sector dynamic stochastic general equilibrium model. Alongside standard features of emerging economies, such as a combination of producer and local currency pricing for exports, fiscal dominance and oil exports, this model also incorporates informal labour and production sectors and examines how...

This paper studies optimal fiscal and monetary policy in a stochastic economy with imperfectly competitive product markets and a discretionary government. We find that, in the flexible price economy, optimal time-consistent policy implements the Friedman rule independently of the degree of imperfect competition. This result is in contrast to the Ramsey literature, where the Friedman rule emerge...

The introductory phase of the European Monetary Union (EMU) ended with the introduction of the euro currency in 2002. We present a review of the experiences with the new monetary union. Using a Taylor rule, we analyze the conduct of monetary policy by the European Central Bank (ECB). The empirical results suggest that the ECB applies similar weights to inflation and the output gap as the Bundes...

In this paper, we analyze the implications of price setting restrictions for the conduct of cyclical fiscal and monetary policy. We consider standard monetary economies that differ in the price setting restrictions imposed on the firms. We show that independently of the degree or type of price stickiness it is possible to implement the same efficient set of allocations, and that each allocation...