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Fiscal Policy and the Monetary Transmission Mechanism

Author

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  • Nicolas Caramp

    (University of California Davis)

  • Dejanir Silva

    (Purdue University)

Abstract

The economy's response to monetary policy depends on its fiscal backing. We present a novel decomposition of the equilibrium that links the wealth effect, i.e. the revaluation of households' financial and human wealth, to the fiscal response to monetary policy. When monetary policy has fiscal consequences, monetary variables affect the timing of aggregate output while fiscal variables shape its present value and the wealth effect. Consequently, a contractionary monetary policy reduces inflation only if followed by contractionary fiscal policy. The slope of the Phillips curve determines the importance of monetary-fiscal coordination for the effectiveness of monetary policy. (Copyright: Elsevier)

Suggested Citation

  • Nicolas Caramp & Dejanir Silva, 2023. "Fiscal Policy and the Monetary Transmission Mechanism," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 716-746, December.
    • Handle: RePEc:red:issued:22-92
    DOI: 10.1016/j.red.2023.08.001
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Monetary Policy and Wealth Effects
      by Christian Zimmermann in NEP-DGE blog on 2020-02-18 14:56:48

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    2. Andryushin, S., 2024. "Interest rate policy of the Bank of Russia in conditions of fiscally-dominant regime: Risks and prospects," Journal of the New Economic Association, New Economic Association, vol. 62(1), pages 211-219.

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    More about this item

    Keywords

    Monetary Policy; Fiscal Backing; Monetary-Fiscal Coordination; Wealth Effect;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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