Published: Mar 2016

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JEL Reference: E5

Working Paper

Monetary and Fiscal Policy Interactions: Leeper (1991) Redux

Abstract:

A natural generalisation of the original Leeper (1991) taxonomy leads to the concepts of globally active (or passive) and globally switching policies to explain the determinacy properties of a model where both monetary and fiscal policies may switch according to a Markov process. Monetary and fiscal policies need to be globally balanced to guarantee a unique equilibrium: globally active monetary policies need to be coupled with globally passive fiscal policies, and switching monetary policies with switching fiscal policies. This new taxonomy also links the determinacy analysis to the model dynamics because it qualifies under which conditions expectations and wealth effects
arise in the Markov-switching model.

 

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Keywords: Monetary Policy and Fiscal Policy Interaction, Markov Switching, Non-linear models.