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  5. New Perspectives on Monetary-Fiscal Interactions
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New Perspectives on Monetary-Fiscal Interactions

Paper Session

Monday, Jan. 5, 2026 8:00 AM - 10:00 AM (EST)

Philadelphia Marriott Downtown, Room 305
Hosted By: Society for Economic Dynamics
  • Chair: Christian Wolf, Massachusetts Institute of Technology

Fiscal Inaction as Monetary Support

George-Marios Angeletos
,
Northwestern University
Chen Lian
,
University of California-Berkeley
Christian Wolf
,
Massachusetts Institute of Technology

Abstract

How does the fiscal framework affect the central bank's ability to stabilize output and inflation? The textbook answer, which assumes Ricardian households, recommends that fiscal adjustment should be fast enough to allow for monetary dominance. We instead argue that, with non-Ricardian households, the central bank may welcome slow, or even absent, fiscal adjustment. On the demand side, slow fiscal adjustment helps stabilize aggregate spending; on the supply side, it eases tax distortions, improving the output-inflation trade off. And while the first channel favors slow fiscal adjustment only when the business cycle is dominated by demand shocks, the second channel extends this preference to supply shocks. A quantitative exercise affirms our lessons in the U.S. context, with the central bank preferring near absent fiscal adjustment over the business cycle.

Time Inconsistency with Heterogeneous Agents

Eduardo Davila
,
Yale University
Andreas Schaab
,
University of California-Berkeley

Abstract

This paper studies the time consistency of welfare assessments and optimal policy in dynamic stochastic economies with heterogeneous agents.

Optimal (Un)Conventional Monetary Policy

Markus K. Brunnermeier
,
Princeton University
Andrey Alexandrov
,
Tor Vergata University of Rome

Abstract

We study the optimal joint interest rate and central bank balance sheet policies in a macro model with a financial sector, sticky prices, aggregate and idiosyncratic risk.

Price Level and Inflation Dynamics in Heterogeneous Agent Economies

Greg Kaplan
,
University of Chicago
George Nikolakoudis
,
University of Chicago
Giovanni L. Violante
,
Princeton University

Abstract

We study price level dynamics in a heterogeneous agent, incomplete-market economy with nominal government debt and flexible prices.
JEL Classifications
  • E3 - Prices, Business Fluctuations, and Cycles
  • E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook