Effective Fiscal-Monetary Interactions in Severe Recessions
IMF Working Papers, September 2, 2022
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Bibliographic details
- Authors: Jiaqian Chen, Raphael A Espinoza, Carlos Goncalves, Tryggvi Gudmundsson, Martina Hengge, Zoltan Jakab, Jesper Lindé
- Published: September 2, 2022
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400218880.001
Overview
- Publication: IMF Working Papers
- Title: "Effective Fiscal-Monetary Interactions in Severe Recessions"
- Authors: Jiaqian Chen, Raphael A Espinoza, Carlos Goncalves, Tryggvi Gudmundsson, Martina Hengge, Zoltan Jakab, Jesper Lindé
- Date: September 2, 2022
- Core question: When binding constraints emerge during severe recessions, can a more integrated fiscal-monetary approach produce better macroeconomic outcomes than a strict separation of policy roles?
Methodology and Evidence
- Model: Simulations of an open economy DSGE model calibrated to emerging and advanced economies.
- Complementary evidence: Case study evidence (nature and scope described in the paper).
- Scenarios considered: Severe recessions with binding constraints that limit standard monetary or fiscal instruments.
Key Findings
- Integrated policy approach:
- When constraints are binding, a more integrated approach to fiscal and monetary policy can lead to a better policy mix.
- Under certain circumstances, this integrated approach can deliver better macroeconomic outcomes.
- Risks and caveats:
- The integrated approach entails risks to institutional credibility.
- Effective application requires clear assessment of each country’s circumstances and safeguards to protect the credibility of the existing institutional framework.
Policy Implications and Recommendations
- Assess country-specific constraints and institutional settings before adopting integrated policy responses.
- Design and implement safeguards to preserve the credibility of existing monetary and fiscal institutions when coordination is intensified.
- Use integrated policy only under circumstances where model simulations and case evidence indicate net macroeconomic benefits, recognizing attendant risks.
Subject and Keywords (as listed)
- Subject: Fiscal policy, Fiscal stimulus, Inflation, Inflation targeting, Monetary policy, Prices, Public debt
- Keywords: Africa, Fiscal stimulus, Global, government spending hike, hike in liquidity trap, Inflation, Inflation targeting, monetary policy rate, open economy, rate in Botswana, recession scenario
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- Working Paper