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 of 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?