Monetary-Fiscal Interactions and the Euro Area's Malaise

43 Pages Posted: 6 Sep 2017 Last revised: 21 May 2023

See all articles by Marek Jarocinski

Marek Jarocinski

European Central Bank (ECB)

Bartosz Maćkowiak

European Central Bank (ECB)

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Date Written: August 2017

Abstract

When monetary and fiscal policy are conducted as in the euro area, output, inflation, and government bond default premia are indeterminate according to a standard general equilibrium model with sticky prices extended to include defaultable public debt. With sunspots, the model mimics the recent euro area data. We specify an alternative configuration of monetary and fiscal policy, with a non-defaultable eurobond. If this policy arrangement had been in place since the onset of the Great Recession, output could have been much higher than in the data with inflation in line with the ECB's objective.

Suggested Citation

Jarocinski, Marek and Maćkowiak, Bartosz, Monetary-Fiscal Interactions and the Euro Area's Malaise (August 2017). NBER Working Paper No. w23746, Available at SSRN: https://ssrn.com/abstract=3031717

Marek Jarocinski (Contact Author)

European Central Bank (ECB) ( email )

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Germany
+49 69 1344 6414 (Phone)

Bartosz Maćkowiak

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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