This paper investigates the conduct of monetary and fiscal policy in the post-ERM period in the UK. Using a simple DSGE New Keynesian model of non-cooperative monetary and fiscal policy interactions under fiscal intra-period leadership, we demonstrate that the past policy in the UK is better...

Recent work on optimal policy in sticky price models suggests that demand management through fiscal policy adds little to optimal monetary policy. We explore this consensus assignment in an economy subject to ‘deep’ habits at the level of individual goods where the counter-cyclicality of...

Recent work on optimal monetary and fiscal policy in New Keynesian models suggests that it is optimal to allow steady-state debt to follow a random walk. Leith and Wren-Lewis (2012) consider the nature of the timeinconsistency involved in such a policy and its implication for discretionary...

We study a business cycle model in which a benevolent …scal authority must determine the optimal provision of government services, while lacking credibility, lump-sum taxes, and the ability to bond fi…nance de…ficits. Households and the fi…scal authority have risk sensitive pref- erences. We...

New Keynesian models rely heavily on two workhorse models of nominal inertia - price contracts of random duration (Calvo, 1983) and price adjustment costs (Rotemberg, 1982) - to generate a meaningful role for monetary policy. These alternative descriptions of price stickiness are often used...

Fiscal consolidations, episodes where governments make large discretionary improvements in their fiscal positions, have received considerable attention, especially in EMU. The existing literature demonstrates that the composition of consolidations is a crucial determinant of their success. We...

This paper develops a small New Keynesian model with capital accumulation and government debt dynamics. The paper discusses the design of simple monetary and fiscal policy rules consistent with determinate equilibrium dynamics in the absence of Ricardian equivalence. Under this assumption,...

Cross-country evidence on sub-central governments’ responses to cuts in grants received from central government shows the typical response is to adjust expenditure rather than offset cuts by raising ‘own’ revenues. Spending cuts are focused on the wage bill and, disproportionately, on...

This paper derives a NewKeynesiandynamic general equilibrium model with liquidity constrained consumers and sticky prices. The model allows a role for both government spending and taxation in the DGE model. The mode lis then estimated using US data. We demonstrate that there seems to be a...

We Assess the extent to which fiscal policy, as automatic stabilisers, can stabilise national economies within EMU. We use a two-country New Keynesian DGE model with liquidity constrained consumers, sticky prices, and a home bias in the composition of national consumption bundles. The model...