The Dire Effects of the Lack of Monetary and Fiscal Coordination / Francesco Bianchi, Leonardo Melosi.

Format:

Book

Author/Creator:

Bianchi, Francesco.

Contributor:

National Bureau of Economic Research.

Melosi, Leonardo.

Series:

Working Paper Series (National Bureau of Economic Research) no. w23605.

NBER working paper series no. w23605

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2017.

Summary:

What happens if the government's willingness to stabilize a large stock of debt is waning, while the central bank is adamant about preventing a rise in inflation? The large fiscal imbalance brings about inflationary pressures, triggering a monetary tightening, further debt accumulation, and additional inflationary pressure. Thus, the economy will go through a spiral of higher inflation, output contraction, and further debt accumulation. A coordinated commitment to inflate away the portion of debt resulting from a large recession leads to better macroeconomic outcomes by separating the issue of long-run fiscal sustainability from the need for short-run fiscal stabilization. This strategy can also be used to rule out episodes in which the central bank becomes constrained by the zero lower bound.

Notes:

Print version record

July 2017.