Shotgun wedding: Fiscal and monetary policy Bassetto and Sargent - - PowerPoint PPT Presentation

Shotgun wedding: Fiscal and monetary policy Bassetto and Sargent

Discussion Frank Smets ADEMU conference 8 October 2020

Great paper

• If you are not yet convinced that fiscal and

monetary policy are tightly linked, read this paper.

• Different manifestations

– Consolidated budget constraint – Modigliani-Miller results for open market operations – Government debt arithmetics when r<g – FTPL

• Great review of the literature
• Bottomline: Where you put the dividing line

between monetary and fiscal policy is arbitrary

Appetite for more

• Section 6 starts discussing a world where

monetary and fiscal authorities have their own balance sheets;

• For many decades, this has been the institutional

reality with price stability being assigned to the central bank: Monetary dominance regime.

• The question is why?

– Time inconsistency? What are the trade offs? – EMU is very different: Not one, but 19 fiscal authorities, with possible beggar-thy-neighbour incentives; Bergin (2000)

Effective lower bound

• Another question is: Should this institutional

paradigm be revised in a low interest rate environment?

• How does this literature connect to the New

Keynesian literature with an effective lower bound on nominal interest rates?

– Benhabib, Schmitt-Grohe and Uribe (2001): “The perils of Taylor rules” – Eichenbaum (2019): “Rethinking fiscal policy in an era

• f low interest rates”
• Asymmetric automatic stabilisers at the ELB
• State-contingent regime switching

Digital currency?

• ECB put out a paper on costs and benefits of a

digital euro;

• Digital currency could change the liquidity

characteristics of money. How would that affect the distinction between monetary and fiscal policy?