Most recent work deriving optimal monetary policy utilising New Neo-Classical Synthesis (NNCS) models abstract from the impact of monetary policy on the government`s finances, by assuming that any change in the government`s budget can be financed through lump sum taxes. In this paper, we assume...

A common feature of exchange rate misalignments is that they produce a divergence between traded and non-traded goods sectors, leading to pressures on monetary policy makers to react. In this paper we develop a small open economy model which features traded and non-traded goods sectors with...

With the adoption of an explicit inflation target in the UK, there has been renewed interest in the properties of alternative interest rate feedback rules. Following Svensson (1999), a literature examining the relative merits of inflation and price level targeting has also developed. In this...

Extending Gali and Monacelli (2004), we build an N-country open economy model, where each economy is subject to sticky wages and prices and, potentially, has access to sales and income taxes as well as government spending as fiscal instruments. We examine an economy either as a small open...

In models with a representative infinitely lived household, modern versions of tax smoothing imply that the steady-state of government debt should follow a random walk.  This is unlikely to be the case in OLG economies, where the equilibrium interest rate may differ from the policy-maker's rate...

This paper examines the interactions between multiple national fiscal policymakers and a single monetary policy maker in response to shocks to government debt in some or all of the countries of a monetary union. We assume that national governments respond to excess debt in an optimal manner, but...

Governments have often combined a monetary policy involving setting nominal interest rates with a fiscal policy that did not seek to target a nominal value of the debt stock. In a model with a traditional backward looking Phillips curve, this fiscal and monetary policy mix may not be stable. If...

Taylor rules which link short-term interest rates to fluctuations in inflation and output, have been shown to be a good guide (both positively and normatively) to the conduct of monetary policy. As a result they have been used extensively to model policy in the context of both closed and open...

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...

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...