This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. The impact of fiscal stimulus depends not only on short-term ...

We study the monetary instrument problem in a model of optimal discretionary fiscal and monetary policy. The policy problem is cast as a dynamic game between the central bank, the fiscal authority, and the private sector. We show that, as long as there is a conflict of interest between the two policy-makers, the central bank’s monetary instrument choice critically affects the Markov-perfect Nas...

This paper characterises optimal monetary policy in an economy with endogenous …rm entry, a cash-in-advance constraint and preset wages. Firms must make pro…ts to cover entry costs; thus the markup on goods prices is e¢cient. However, because leisure is not priced at a markup, the consumption-leisure tradeo¤ is distorted. Consequently, the real wage, hours and production are suboptimally low. D...

We revisit the issue of multiplicity of equilibria when monetary policy is conducted with either the interest rate or the money supply as the sole instrument of policy. We show that in standard monetary models there are interest rate feedback rules, and also money supply rules, that implement a unique global equilibrium. This is a contribution to a literature that either concentrates on conditi...

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...