Abstract:
This paper studies a simple New-Keynesian model of fiscal and monetary policy coordination when the policymaker acts under commitment. With a New Keynesian Phillips curve it is optimal to control inflation only through the use of monetary policy. But, when price-setters use a Steinsson (2003) Phillips curve, fiscal policy plays an active role, enabling a greater degree of consumption smoothing.
Citation:
Vines, David & Luk, Paul, 2015, Optimal Monetary and Fiscal Policy in an Economy with Inflation Persistence," CEPR Discussion Papers 10586, C.E.P.R. Discussion Papers, https://ideas.repec.org/p/cpr/ceprdp/10586.html