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The Macroeconomic Impact Of Monetary-Fiscal Policy In A “Fiscal Dominance” World

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  • Jia, Pengfei

Abstract

This paper focuses on the question of what monetary and fiscal policy can do and should do in a “fiscal dominance” world. I first highlight that both “amplification” and “fiscal cushion” effects are always at work jointly in determining the evolution of inflation. I find the threshold of maturity of government bonds beyond which more aggressive monetary policy dampens inflation volatility is three quarters. In addition, I conduct welfare analysis to quantitatively evaluate the costs and benefits brought by long-term debt. My results show that the threshold of government debt maturity above which an aggressive monetary policy improves welfare is eight quarters. More importantly, I characterize optimal monetary and fiscal policy using simple and implementable rules. My results indicate an optimal monetary and fiscal combination calls for an aggressive response in both rules. Finally, I find that optimized simple monetary-fiscal rule is significantly welfare inferior to the Ramsey optimal policy.

Suggested Citation

  • Jia, Pengfei, 2020. "The Macroeconomic Impact Of Monetary-Fiscal Policy In A “Fiscal Dominance” World," Macroeconomic Dynamics, Cambridge University Press, vol. 24(3), pages 670-707, April.
    • Handle: RePEc:cup:macdyn:v:24:y:2020:i:3:p:670-707_6
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    Cited by:

    1. Guillermo Santos, 2022. "Optimal fiscal policy and the Fiscal Theory of the Price Level," LIDAM Discussion Papers IRES 2022022, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. A.I. Pogorletskiy & N.V. Pokrovskaia, 2021. "Comparative Analysis of Fiscal Regulation Measures of the G20 Countries in the Era of the Coronavirus Crisis and in the Post-Coronavirus Perspective," Journal of Applied Economic Research, Graduate School of Economics and Management, Ural Federal University, vol. 20(1), pages 31-61.

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