Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of...

We study the monetary instrument problem in a model of optimal discretionary fiscal and monetary policy. The policy problem is cast as a dynamic game between the central bank, the fiscal authority, and the private sector. We show that, as long as there is a conflict of interest between the two...

This paper shows that multiple steady states occur if a central bank is not independent and is compelled to finance a large fiscal deficit through seigniorage. If the initial capital stock is less than a certain threshold, the economy converges to a steady state where the capital stock is low...