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Monetary and Fiscal Policy Interactions: Leeper (1991) Redux

Author

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  • Guido Ascari
  • Anna Florio
  • Alessandro Gobbi

Abstract

A natural generalisation of the original Leeper (1991) taxonomy leads to the concepts of globally active (or passive) and globally switching policies to explain the determinacy properties of a model where both monetary and fiscal policies may switch according to a Markov process. Monetary and fiscal policies need to be globally balanced to guarantee a unique equilibrium: globally active monetary policies need to be coupled with globally passive fiscal policies, and switching monetary policies with switching fiscal policies. This new taxonomy also links the determinacy analysis to the model dynamics because it qualifies under which conditions expectations and wealth effectsarise in the Markov-switching model.

Suggested Citation

  • Guido Ascari & Anna Florio & Alessandro Gobbi, 2016. "Monetary and Fiscal Policy Interactions: Leeper (1991) Redux," Economics Series Working Papers 788, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:788
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    References listed on IDEAS

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    1. Guido Ascari & Tiziano Ropele, 2009. "Trend Inflation, Taylor Principle, and Indeterminacy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(8), pages 1557-1584, December.
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    6. Hess Chung & Troy Davig & Eric M. Leeper, 2007. "Monetary and Fiscal Policy Switching," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 809-842, June.
    7. Eric M. Leeper & Nora Traum & Todd B. Walker, 2015. "Clearing Up the Fiscal Multiplier Morass: Prior and Posterior Analysis," NBER Working Papers 21433, National Bureau of Economic Research, Inc.
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    9. Farmer, Roger E.A. & Waggoner, Daniel F. & Zha, Tao, 2009. "Understanding Markov-switching rational expectations models," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1849-1867, September.
    10. Zheng Liu & Daniel Waggoner & Tao Zha, 2009. "Asymmetric Expectation Effects of Regime Shifts in Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 284-303, April.
    11. Saroj Bhattarai & Jae Won Lee & Woong Yong Park, 2012. "Monetary-Fiscal Policy Interactions and Indeterminacy in Postwar US Data," American Economic Review, American Economic Association, vol. 102(3), pages 173-178, May.
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    Cited by:

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    2. Ascari, Guido & Florio, Anna & Gobbi, Alessandro, 2018. "High trend inflation and passive monetary detours," Economics Letters, Elsevier, vol. 172(C), pages 138-142.
    3. Ascari, Guido & Florio, Anna & Gobbi, Alessandro, 2018. "High trend inflation and passive monetary detours," Economics Letters, Elsevier, vol. 172(C), pages 138-142.

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    More about this item

    Keywords

    Monetary Policy and Fiscal Policy Interaction; Markov Switching; Non-linear models.;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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