Optimal monetary and fiscal policies in a search theoretic model of monetary exchange

Search models of monetary exchange commonly assume that terms of trade in anonymous markets are determined via Nash bargaining, which generally causes monetary equilibrium to be inefficient. Bargaining frictions add to the classical intertemporal distortion present in most monetary models, whereby agents work today to obtain cash that can be used only in future transactions. In this paper, we study the properties of optimal fiscal and monetary policy within the framework of Lagos and Wright (2005). We show that fiscal policy can be implemented to alleviate underproduction while money is still essential. If lump sum monetary transfers are available, a production subsidy can restore the efficiency of monetary equilibria. The Friedman rule belongs to the optimal policy set, but higher inflation rates are also possible. When lump-sum monetary transfers are not available, equilibrium allocations are generally not first-best. Nevertheless, fiscal policy still results in substantial welfare gains. Money can be extracted from circulation via a sales tax on decentralized market activities, and the Friedman rule is only optimal if the buyer has relatively low bargaining power.     

CENTRAL BANK INDEPENDENCE AND THE MONETARY INSTRUMENT PROBLEM

We study the monetary instrument problem in a dynamic noncooperative game between separate, discretionary, fiscal and monetary policy makers. We show that monetary instruments are equivalent only if the policy makers' objectives are perfectly aligned; otherwise an instrument problem exists. When the central bank is benevolent while the fiscal authority is short‐sighted relative to the private sector, excessive public spending and debt emerge under a money growth policy but not under an interest rate policy. Despite this property, the interest rate is not necessarily the optimal instrument.     

What is the right balance between US monetary and fiscal policy? Explorations using simulated wavelet-based optimal tracking control

This paper uses wavelet-based optimal control to simulate fiscal and monetary strategies under different levels of policy restrictions. The model applies the maximal overlap discrete wavelet transform to US quarterly GDP data and then uses the decomposed variables to build a large 80-dimensional state-space linear-quadratic tracking model. Using a political targeting design for the frequency range weights, we simulate jointly optimal fiscal and monetary policy where: (1) both fiscal and monetary policy are dually emphasized, (2) fiscal policy is unrestricted while monetary policy is restricted to achieving a steady increase in the market interest rate, (3) only monetary policy is relatively active, while fiscal spending is restricted to achieving a target growth rate, and (4) monetary policy emphasizes short-run stabilization, while fiscal policy utilizes political cycle targeting. The results show that fiscal policy must be more aggressive when the monetary authorities are not accommodating the fiscal expansion and that the dual-emphasis policy leads to a series of interest rate increases that are balanced between a steadily increasing target and a low, fixed rate. This research is the first to construct integrated fiscal and monetary policies in an applied wavelet-based optimal control setting using US data.     

Optimal Choice of a Proximate Monetary Target in an Open Economy*

This paper investigates the implications of hitting a monetary target (rate of interest or money supply) in an open economy. The technique of linear optimal control is applied to a small open economy of the Australian economy. A feature of the model is the interrelationship between the monetary and open sectors which complicates the use of monetary policy. Four optimal control experiments are reported in detail. The results indicate that we should aim for a money-supply target rather than an interest-rate target and that some assistance from fiscal policy should be provided to monetary policy in order to achieve this target.     

我国企业投资对财政货币政策冲击反应的实证分析

本文运用结构向量自回归（SVAR）模型方法研究了我国企业投资对财政货币政策冲击的反应。通过采用1998年1月～2009年4月的月度数据实证研究表明：在经济周期的不同阶段,央行控制货币供给量的能力存在差异,导致货币政策执行效果不同。在经济繁荣阶段,社会资金运用效率较高,不存在剩余流动性,央行可以较容易地通过调整基础货币和货币乘数控制货币供给总量。这时货币供给的外生性较强,货币政策作用效果比较显著;而在经济衰退阶段,可选择的投资机会较少,流动性相对过剩,货币供给内生性增强,这时央行采取扩张性货币政策不能有效提高货币供给量,货币政策作用效果减弱。短期内虽然财政支出对企业投资会产生正向影响,但是负向影响要大于正向影响,也就是说财政政策对企业投资具有明显的挤出效应。     

Optimal fiscal and monetary policy with sticky wages and sticky prices

We determine the optimal degree of price inflation volatility when nominal wages are sticky and the government uses state-contingent inflation to finance government spending. We address this question in a well-understood Ramsey model of fiscal and monetary policy, in which the benevolent planner has access to labor income taxes, nominally risk-free debt, and money creation. Our main result is that sticky wages alone make price stability optimal in the face of shocks to the government budget, to a degree quantitatively similar as sticky prices alone. Key for our results is an equilibrium restriction between nominal price inflation and nominal wage inflation that holds trivially in a Ramsey model featuring only sticky prices. Our results thus show that when nominal wages are sticky, setting real wages as close as possible to their efficient path is a more important goal of optimal monetary policy than is financing innovations in the government budget via state-contingent inflation. A second important result is that the nominal interest rate can be used to indirectly tax the rents of monopolistic labor suppliers. Taken together, our results uncover features of Ramsey fiscal and monetary policy in the presence of a type of labor market imperfection that is widely-believed to be important.     

Optimal Monetary Policy, Taxes, and Public Debt in an Intertemporal Equilibrium

This article is devoted to a study of the optimal monetary and fiscal policies within the framework of an overlapping generations model with cash-in-advance constraints. We first characterize the intertemporal equilibrium. Then we show how to decentralize the optimal growth path using available policy instruments (i.e., labor income and capital taxes, public debt, money supply). Between the four instruments: wages and capital taxes, debt and monetary policy, one is redundant among the three last which implies that the Friedman Rule is only a special case.     

Inside and outside fiat money, gains to trade, and IS-LM

Summary. We build a one-period general equilibrium model with money. Equilibrium exists, and fiat money has positive value, as long as the ratio of outside money to inside money is less than the gains to trade available at autarky. We show that the nominal effects of government fiscal and monetary policy can be completely described by a diagram identical in form to the IS-LM curves introduced by Hicks to describe Keynes' general theory. IS-LM analysis is thus not incompatible with full market clearing, multiple commodities, and heterogeneous households. We show that as the government deficit approaches a finite threshold, hyperinflation sets in (prices converge to infinity and real trade collapses). At the other extreme, if the government surplus is too large, the economy enters a liquidity trap in which nominal GNP sinks and monetary policy is ineffectual. Received: January 2, 2002; revised version: April 8, 2002 Correspondence to: P. Dubey     

中国货币政策与财政政策协调机制的均衡分析 ——基于非线性结构模型系统

为探究货币财政政策在既定宏观经济目标下政策协调的最优均衡策略,本文引入内生的政府支出政策,并基于非线性利率及财政赤字率作用的货币供应量方程构建非线性结构模型.进一步地,对包含内生政策的非线性结构模型进行对数线性化处理与参数校准,并基于既定预期目标研究货币政策与财政政策的协调问题.特别地,对2008年和2017年进行了政策均衡模拟分析.通过模拟分析可以发现,当经济出现较大波动时,采用本文模型可以得到满足均衡情况的实际利率和财政赤字率的最优政策组合,与我国当前实际经济采取的政策组合较为一致.     

中国货币供给与经济增长关系的实证研究

金融危机爆发后,为了保持经济平稳高速增长,中国制定了一揽子财政政策和货币政策。将货币政策的中介指标货币供给量与经济增长之间的关系进行实证研究,结果表明:中国实际货币供给量与实际经济增长之间有长期稳定的均衡关系;中国实际经济增长率是实际货币供给增长率的格兰杰原因,但实际货币增长率却不是实际经济增长率的格兰杰原因。     

The government budget constraint with endogenous money

This paper examines the effectiveness and stability of fiscal policy in a model with a budget constraint and an endogenous money stock. This model avoids the need to treat only two polar cases, pure bond and pure money financing-neither of which is appropriate given the structure of the monetary system and the way monetary policy has been conducted historically. Furthermore, the model allows one to differentiate the effects of a money-financed deficit for the different tools of monetary control. We find that neither the long-run effectiveness nor stability of a mixed bond/money financed deficit is invariant to the monetary policy tool used.     

当前宏观经济政策中几个疑点问题分析

本在充分肯定当前宏观经济政策基本走向的同时,对财政政策、货币政策、收入分配政策中几个疑点问题进行了全面深入的分析,提出了富有新意的见解。作的结论是：“积极的财政政策”、“适当的货币政策”,这样的概括和称谓不科学;反通货紧缩用货币量的单纯扩张不能通缩的结果很可能是滞胀;公职人员加薪不能带动其他社会成员增收,其它社会群体增加收入要从他们所处的现实经济关系中去寻找。     

Keynes's theory of liquidity preference and his debt management and monetary policies

This paper seeks to bolster the view that Keynes was a monetaryeconomist concerned primarily with monetary and not fiscal policy.His most fundamental policy conclusion for national economieswas that the authorities could control the long-term rate ofinterest and should do so to promote investment, growth andemployment. Keynes's theory of liquidity preference is presentedas a theory of money as a store of value that leads to thisfundamental policy conclusion. The theory is then applied toexplain the debt management, monetary and international financialpolicies that were adopted in World War II.     

Budget deficits,money growth and inflation: the Turkish evidence

The paper investigates the long-run relationships between budget deficits, inflation and monetary growth in Turkey considering two alternative trivariate systems corresponding to the narrowest and the broadest monetary aggregates. While the joint endogeneity of money and inflation rejects the validity of the monetarist view, lack of a direct relationship between inflation and budget deficits makes the pure fiscal theory explanations illegitimate for the Turkish case. Consistent with the policy regime of financing domestic debt through the commercial banking system, budget deficits lead to a growth not of currency seigniorage but of broad money in Turkey. This mode of deficit financing, leading to the creation of near money and restricting the scope for an effective monetary policy, may not be sustainable, as the government securities/broad money ratio cannot grow without limit.     

INTERACTION BETWEEN MONETARY AND FISCAL AUTHORITIES UNDER INCOMPLETE INFORMATION

This paper analyzes the interaction between monetary and fiscal authorities under incomplete information. The inflation goal of the central bank is assumed to be unknown to the fiscal authority and the public. The central bank signals the goal by choosing the first‐period monetary policy before the fiscal authority joins the policy‐making game. If the central bank would like the fiscal authority and the public to believe that it is wet (dry), the central bank would distort the money supply upward (downward) in order to reveal its actual type.     

General Equilibrium Impacts of Monetary and Fiscal Policies on Welfare of Households in South Asia

Impacts of fiscal and monetary policies are assessed in an open economy two sector multi‐household general equilibrium tax model with money for South Asia. Despite impressive growth rates there is evidence for alarming gaps in the distribution of income among households that require very careful design of economic policies. Generally the impacts of fiscal expansions are positive for all categories of households under the flexible price system but the gains are much higher for households in the upper income group than for those in the bottom. In theory the equilibrium relative prices guarantee the optimal allocation of resources in such economy. Simulation results show that demand, output and employment are sensitive to the preferences of consumers, confidence of producers and sector specific production technologies. Monetary policy is super‐neutral under flexible price regime but can complement fiscal policy well when aggregate prices are made sticky. Combination of monetary and fiscal policies in this manner can have extensive impacts in efficiency and redistribution. Higher taxes distort incentives to work and investment from richer households slowing down the economy. This reduces the welfare level of both rich and poor. Flexibility in prices enhances the market mechanism and makes the fiscal policy more effective and efficient.     

Stochastic and structural fiscal policy in a monetary stationary economy

In the framework of a monetary asset pricing model which is simple enough to generate closed form formulae for equilibrium price functions the interactions between output, fiscal policy, and asset markets is investigated. With money yielding liquidity services in the exchange process real stock prices are negatively correlated with anticipated (stochastic) fiscal policy changes, while the impact of unanticipated (structural) fiscal policy on the stock market depends qualitatively on the ‘business cycle’ of the economy. It is shown that the monetary character of the economy, more precisely the role of money in the exchange process, is critical for the relationship between fiscal policy and real share prices. Moreover, while contingent fiscal policy measures may be successful in stabilizing the real interest rate on money they are incapable of achieving a stable term structure of the real rate on stocks. In contrast, uncontingently higher public expenditures generally promote the volatility of the real rates on financial assets.     

Inflation bias and markup shocks in a LAMP model with strategic interaction of monetary and fiscal policy

This paper investigates the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authorities are independent and play strategically. It shows that: (i) both the long run and the short run equilibrium require a departure from zero inflation rate; (ii) in response to a markup shock, fiscal policy becomes more aggressive as the fraction of liquidity constrained agents increases and price stability is no longer optimal even under Ramsey; (iii) overall, optimal discretionary policies imply welfare losses for Ricardians, while liquidity constrained consumers experience welfare gains with respect to Ramsey.     

最优财政和货币政策及其福利效应分析

本文建立了财政和货币政策协作的最优政策模型,并以中国经济为研究对象,以福利效应为最优政策的评估标准,研究了财政和货币政策协作的最优政策机制。分析表明:在Ramsey最优均衡下,财政和货币政策共同作用于通货膨胀和产出目标,以严格通货膨胀为目标的最优货币规则会使得政策的福利损失最小,但货币政策在产出目标、通货膨胀目标以及政策福利损失三者上不能同时兼顾;最优财政规则是趋向缩小收支差,从而趋近于福利损失最小。本文同时使用贝叶斯分析,对中国经济政策2005年第一季度至2009年第二季度的福利效应进行了评估,实证分析表明:样本期间政策的无条件福利损失处于波动状态,经济增长增加了家庭部门的条件福利损失,即经济增长导致跨期消费成本增加。