Fiscal and Monetary Policy Interactions: Empirical Evidence and Optimal Policy Using a Structural New Keynesian Model

40 Pages Posted: 1 Dec 2003

See all articles by Anton Muscatelli

Anton Muscatelli

University of Glasgow - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Patrizio Tirelli

Department of Economics and Management; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Carmine Trecroci

University of Brescia

Date Written: October 2003

Abstract

This paper examines the interaction of monetary and fiscal policies using an estimated New Keynesian dynamic general equilibrium model for the US. In contrast to earlier work using VAR models, we show that the strategic complementarity or substitutability of fiscal and monetary policy depends crucially on the types of shocks hitting the economy, and on the assumptions made about the underlying structural model. We also demonstrate that countercyclical fiscal policy can be welfare-reducing if fiscal and monetary policy rules are inertial and not co-ordinated.

JEL Classification: E58, E62, E63

Suggested Citation

Muscatelli, Vito Anton and Tirelli, Patrizio and Trecroci, Carmine, Fiscal and Monetary Policy Interactions: Empirical Evidence and Optimal Policy Using a Structural New Keynesian Model (October 2003). CESifo Working Paper Series No. 1060, Available at SSRN: https://ssrn.com/abstract=462440 or http://dx.doi.org/10.2139/ssrn.462440

Vito Anton Muscatelli (Contact Author)

University of Glasgow - Department of Economics ( email )

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Patrizio Tirelli

Department of Economics and Management ( email )

Corso Strada Nuova, 65
27100 Pavia, 27100
Italy

HOME PAGE: http://https://sites.google.com/site/patriziotirellihomepage/

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Carmine Trecroci

University of Brescia ( email )

Via San Faustino 74B
Brescia, 25122
Italy

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