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The Optimal Monetary and Fiscal Policy Mix in a Financially Heterogeneous Monetary Union
Recent work on financial frictions in New Keynesian models suggest that there is a sizable spread between the risk-less interest rate and the borrowing rate. We analyze the optimal policy mix of monetary and fiscal authorities in a currency union with a country-specific credit spread by introducing...
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| Veröffentlicht in: | MAGKS - Joint Discussion Paper Series in Economics (Band 06-2015) |
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| 1. Verfasser: | |
| Format: | Artikel |
| Sprache: | Englisch |
| Veröffentlicht: |
Philipps-Universität Marburg
2015
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| Schlagworte: | |
| Online Zugang: | PDF-Volltext |
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| Zusammenfassung: | Recent work on financial frictions in New Keynesian models suggest that there is a sizable spread between the risk-less interest rate and the borrowing rate. We analyze the optimal policy mix of monetary and fiscal authorities in a currency union with a country-specific credit spread by introducing a cost channel differ- ential. The cost channel decreases the efficiency of monetary policy and increases the need for fiscal stabilization. We show that the importance of fiscal policy in stabilizing shocks increases, when there is a gap in the inflation differential due to a relative shock, an idiosyncratic shock or a credit spread differential. The welfare losses will be increasing (decreasing) in the size of the cost channel, if the nominal interest rate is a demand- (supply-) side instrument. |
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| Umfang: | 46 Seiten |
| ISSN: | 1867-3678 |
| DOI: | 10.17192/es2024.0368 |