Interactions of Monetary and Fiscal Policy via Open Market Operations
Year: 2004
Type: article
Abstract: We examine interactions of monetary and fiscal policy in a sticky price model where public debt is non-neutral, as it provides transaction services. This property is brought about by a legal restriction on open market operations by which only government bonds are eligible. Debt creation eases access to money and can therefore induce households to increase purchases of goods. Government expenditures, which are not completely tax financed, and deficit financed tax cuts then tend to stimulate private consumption. However, for these fiscal impulses to raise real activity monetary policy should not too aggressively aim at stabilising the economy.
Source: The Economic Journal
Author: Andreas Schabert
Institution: University of Cologne
Language: English
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2121890935