Final published version, 305 KB, PDF document
Research output: Working paper
}
TY - UNPB
T1 - Infrequent fiscal stabilization
AU - Bai, Yuting
AU - Kirsanova, Tatiana
PY - 2014
Y1 - 2014
N2 - This paper studies discretionary non-cooperative monetary and …fiscal policy stabilization in a New Keynesian model, where the …fiscal policymaker uses a distortionary tax as the policy instrument and operates with long periods between optimal time-consistent adjustments of the instrument. We demonstrate that longer …fiscal cycles result in stronger complementarities between the optimal actions of the monetary and …fiscal policymakers. When the …fiscal cycle is not very long, the complementarities lead to expectation traps. However, with a sufficiently long …fiscal cycle –one year in our model –no learnable time-consistent equilibrium exists. Constraining the …fiscal policymaker in its actions may help to avoid these adverse effects.
AB - This paper studies discretionary non-cooperative monetary and …fiscal policy stabilization in a New Keynesian model, where the …fiscal policymaker uses a distortionary tax as the policy instrument and operates with long periods between optimal time-consistent adjustments of the instrument. We demonstrate that longer …fiscal cycles result in stronger complementarities between the optimal actions of the monetary and …fiscal policymakers. When the …fiscal cycle is not very long, the complementarities lead to expectation traps. However, with a sufficiently long …fiscal cycle –one year in our model –no learnable time-consistent equilibrium exists. Constraining the …fiscal policymaker in its actions may help to avoid these adverse effects.
KW - Monetary and fiscal policy interactions
KW - distortionary taxes
KW - discretionary policy
KW - LQ RE models
M3 - Working paper
T3 - Economics Working Paper Series
BT - Infrequent fiscal stabilization
PB - Lancaster University, Department of Economics
CY - Lancaster
ER -