Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/200563
Authors: 
Bianchi, Francesco
Melosi, Leonardo
Year of Publication: 
2017
Series/Report no.: 
Working Paper 2017-19
Abstract: 
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.
Subjects: 
Monetary and fiscal policies
coordination
emergency budget
Markov-switching models
liquidity traps
JEL: 
E31
E52
E62
E63
D83
Document Type: 
Working Paper

Files in This Item:
File
Size
611.33 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.