The design of monetary and fiscal policy: A global perspective

Jess Benhabib, Stefano Eusepi

    Research output: Contribution to journalArticle

    Abstract

    We study the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies. We show that the presence of capital is indeed another independent source of local and global multiplicities, even under active policies that yield local determinacy. We also show how a very similar mechanism generates multiplicities in models with bonds and distortionary taxation. We then explore the design of monetary policies that avoid multiple equilibria. We show that interest rate policies that respond to the output gap, while potentially a source of significant inefficiencies, may be effective in preventing multiple equilibria and costly oscillatory equilibrium dynamics.

    Original languageEnglish (US)
    Pages (from-to)40-73
    Number of pages34
    JournalJournal of Economic Theory
    Volume123
    Issue number1 SPEC. ISS.
    DOIs
    StatePublished - Jul 2005

    Keywords

    • Fiscal policy
    • Global dynamics
    • Multiple equilibria
    • Taylor rules

    ASJC Scopus subject areas

    • Economics and Econometrics

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