American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Fiscal and Monetary Policy Interactions in a Model with Low Interest Rates
American Economic Journal: Macroeconomics
vol. 16,
no. 4, October 2024
(pp. 35–76)
Abstract
We provide a new Keynesian model where entrepreneurs face uninsurable idiosyncratic investment risk and credit constraints. Government bonds provide liquidity services. Multiple steady states with positive values of public debt can be supported for a given permanent deficit-to-output ratio. The steady-state interest rates are lower than the economic growth rate, and public debt contains a bubble component. We analyze the determinacy regions of policy parameter space and find that a large set of monetary and fiscal policy parameters can achieve debt and inflation stability given persistent fiscal deficits both away from and at the zero interest rate lower bound.Citation
Miao, Jianjun, and Dongling Su. 2024. "Fiscal and Monetary Policy Interactions in a Model with Low Interest Rates." American Economic Journal: Macroeconomics, 16 (4): 35–76. DOI: 10.1257/mac.20220232Additional Materials
JEL Classification
- E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
- E23 Macroeconomics: Production
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- E62 Fiscal Policy
- H63 National Debt; Debt Management; Sovereign Debt
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