Consensus monetary business cycle theory is hardly able to rationalize why ...scal policy is repeatedly found to stimulate private consumption and why monetary policy should care about Ricardian ...scal policy. In this paper we demonstrate that this changes when government bonds provide liquidity services. We develop a simple business cycle, which can be solved analytically, where money is supp...

We compare two ways of modeling Calvo-type wage stickiness. One in which each household is the monopolistic supplier of a differentiated type of labor input (as in Erceg, et al., 2000) and one in which households supply a homogenous labor input that is transformed by monopolistically competitive labor unions into a differentiated labor input (as in Schmitt-Grohé and Uribe, 2006a,b). We show tha...

How do di¤erent levels of government debt a¤ect the optimal conduct of monetary and …scal policies? And what do these optimal policies imply for the evolution of government debt over time? To provide an answer, this paper studies a standard monetary policy model with nominal rigidities and monopolistic competition and adds to it a …scal authority that issues nominal non-state contingent debt, l...

The objective of this study is to investigate the behaviour of monetary and fiscal authorities in the Euro area. Our main contribution is joint modelling of behaviour of the two authorities. Our investigation highlights a number of facts. The systematic monetary policies adopted by the non-German authorities in the seventies were not capable of stabilizing inflation. Such results has been achie...

A Financial Stability Fund set by a union of sovereign countries (e.g. the European Stability Mechanism) can improve countries’ ability to share risks, borrow and lend, with respect to the standard instrument: sovereign debt financing. Efficiency gains arise from the ability of the fund to offer long-term contingent financial contracts, subject to limited enforcement and moral hazard constraint...

This paper tests various political business cycle theories in a New Keynesian model with a monetary and fiscal policy mix. All the policy coefficients, the target levels of inflation and the budget deficit, the firms’ frequency of price setting, and the standard deviations of the structural shocks are allowed to depend on ‘‘political’’ regimes: a preelection versus postelection regime, a regime...

We study optimal monetary and fiscal policy at the zero lower bound in a small open economy model with sticky prices and a flexible exchange rate. In such a liquidity trap situation, the economy suffers from a negative output gap, producer price deflation, and an appreciated real exchange rate (compared to its efficient level). The extent of these adverse effects and the duration of the liquidi...

This paper analyzes the welfare costs of business cycles when workers face uninsurable job displacement risk that has a cyclical component. Using a simple general equilibrium model with incomplete markets, this paper shows the following result: for sufficiently high degree of risk aversion (at least one), cyclical variations in the long-term earnings losses of displaced workers can generate arb...

This paper relies on the new Keynesian model with in‡ation persistence to characterize the optimal monetary and …scal policy in a liquidity trap. It shows that, with a Phillips curve that is both forward and backward looking, the monetary policy that is implemented during a liquidity trap episode can lift the economy out of depression. The central bank does not need to commit beyond the end of ...