Policy mix problems may arise in a monetary union with centralized monetary policy and decentralized fiscal policy. A consequence of this may be an inappropriate stabilization of shocks. This paper addresses how policy coordination problems are affected by the objectives of the monetary...

In expectations-driven liquidity traps, a higher inflation target is associated with lower inflation and consumption. As a result, introducing the possibility of expectations-driven liquidity traps to an otherwise standard model lowers the optimal inflation target. Using a calibrated New...

In this paper we derive optimal monetary targeting rules under various assumptions about fiscal behavior. In contrast to the existing literature we use a linear-quadratic approach and allow for dynamic games between the two policy authorities. It is shown that optimal monetary behavior is...

We analyze money financing of fiscal transfers (helicopter money) in two simple New Keynesian models: a "textbook" model in which all money is non-interest-bearing (e.g., all money is currency), and a more realistic model with interest-bearing reserves. In the textbook model with only...

The combination of discretionary monetary policy, labor-market distortions and nominal wage rigidity yields an inflation bias as monetary policy tries to exploit nominal wage contracts to address labour-market distortions Although an inflation target eliminates this inflation bias, it creates a...

This study analyses the aspect of inflation expectations management in the context of inflation targeting by particularly focusing on the impact of exchange rate pass-through to inflation expectations in a small open economy. We also augment the inflation expectations function with GDP,...

To raise the euro's inflation target without an inflationary default and meanwhile to promote growth and the realignment of the relative prices and wages between countries, two other heterodox actions are necessary: the substitution of previously issued bonds by new ones with higher denominated...

This paper investigates how institutional constraints discipline the behavior of discretionary governments subject to an expenditure bias. The focus is on constraints implemented in actual economies: monetary policy targets, limits on the deficit and debt ceilings. For a variety of aggregate...

This paper analyzes fiscal and monetary policy interaction in a simple policy game with debt and output shocks. Seigniorage provides revenue for the government but results in inflation-bias. We analyze three mechanism designed to eliminate some or all of the biases in monetary policy: an...

In this article, the issue of the monetary independence problem in view of the Romania's European Monetary Union accession is investigated empirically. It is frequently argued that for such a country, the main cost of participation in a currency area is the loss of monetary policy independence....