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Strategic Monetary–Fiscal Interactions in a Downturn

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  • Jan Libich
  • Dat Thanh Nguyen

Abstract

type="main" xml:id="ecor12182-abs-0001"> Highly diverse responses of monetary and fiscal policies have been observed around the world in the post global financial crisis period of 2010–2014. While some countries implemented various mixes of monetary and/or fiscal stimuli, others have seen austerity. Our paper explores whether the strategic interaction between the central bank and government can shed some light on this diversity, and what lessons about the institutional design of the two policies can be learnt from it. This is done by mapping a reduced-form New Keynesian model into a generalised game-theoretic framework with deterministic and stochastic revisions of policy actions. Our focus is on the short-term policy interaction regarding stabilisation of an adverse shock (rather than long-term issues related to fiscal sustainability and unpleasant monetarist arithmetic). Particular attention is paid to the effect of institutional and structural features such as inflation targeting, monetary and fiscal implementation lags, and the policies’ leadership.

Suggested Citation

  • Jan Libich & Dat Thanh Nguyen, 2015. "Strategic Monetary–Fiscal Interactions in a Downturn," The Economic Record, The Economic Society of Australia, vol. 91(293), pages 172-190, June.
    • Handle: RePEc:bla:ecorec:v:91:y:2015:i:293:p:172-190
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    File URL: http://hdl.handle.net/10.1111/ecor.2015.91.issue-293
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    Cited by:

    1. Lech Kruś & Irena Woroniecka-Leciejewicz, 2017. "Monetary-Fiscal Game Analyzed Using a Macroeconomic Model for Poland," FindEcon Chapters: Forecasting Financial Markets and Economic Decision-Making, in: Magdalena Osińska (ed.), Statistical Review, vol. 64, 2017, 3, edition 1, volume 64, chapter 1, pages 285-304, University of Lodz.
    2. Dat Thanh Nguyen & Viet Anh Hoang, 2020. "Monetary Consequences of Fiscal Stress in a Game Theoretic Framework," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 125-164.

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