Monetary and fiscal policy interaction: the current consensus assignment in the light of recent developments

Kirsanova, T. , Leith, C. and Wren-Lewis, S. (2009) Monetary and fiscal policy interaction: the current consensus assignment in the light of recent developments. Economic Journal, 119(541), F482-F496. (doi:10.1111/j.1468-0297.2009.02317.x)

Kirsanova, T. , Leith, C. and Wren-Lewis, S. (2009) Monetary and fiscal policy interaction: the current consensus assignment in the light of recent developments. Economic Journal, 119(541), F482-F496. (doi:10.1111/j.1468-0297.2009.02317.x)

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Abstract

In the last few years papers have begun to analyse optimal monetary and fiscal policy in models incorporating nominal rigidities where social welfare is derived from the utility of agents. This article examines whether this analysis provides support for the consensus assignment, where monetary policy controls demand and inflation and fiscal policy controls government debt. We argue that the basic structure of New Keynesian models implies that monetary policy dominates fiscal policy as a means of controlling inflation. No similar dominance appears to operate for fiscal policy and debt, if debt has to return to its initial level after shocks.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Kirsanova, Professor Tatiana and Leith, Professor Campbell
Authors: Kirsanova, T., Leith, C., and Wren-Lewis, S.
Subjects:H Social Sciences > HB Economic Theory
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Economic Journal
ISSN:0013-0133
ISSN (Online):1468-0297
Published Online:01 October 2009

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Project CodeAward NoProject NamePrincipal InvestigatorFunder's NameFunder RefLead Dept
480171New Directions in Monetary and Fiscal Policy Analysis at the Macroeconomic LevelCampbell LeithEconomic & Social Research Council (ESRC)ES/G006873/1BUS - ECONOMICS