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

shotgun wedding fiscal and monetary policy bassetto and
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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.


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Shotgun wedding: Fiscal and monetary policy Bassetto and Sargent

Discussion Frank Smets ADEMU conference 8 October 2020

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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

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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)

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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
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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?