2024/10/01 by SEONGHOON CHO, Seonghoon Cho, ANTONIO MORENO +1 · 3 citations
Economics, Econometrics and Finance · Mathematics · #Determinacy #Economic Theory and Policy #Economics #Fiscal policy #Global Financial Crisis and Policies #Keynesian economics #Macroeconomics #Mathematical economics #Mathematics #Monetary Policy and Economic Impact #Monetary economics #Monetary policy #Philosophy #Zero (linguistics) #Zero lower bound
paper · pdf · doi:10.1111/jmcb.13204
published in Journal of money credit and banking 58(2), 421-448 (Wiley)
openalex publication_date 2024/10/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Abstract In a fixed‐regime context, it has been established since the work of Leeper (1991) that a determinate and unique equilibrium can be achieved under both monetary dominance (characterized by an active monetary policy and a passive fiscal policy) and fiscal dominance (characterized by an active fiscal policy and a passive monetary policy) regimes yield a determinate unique equilibrium. In this paper, we generalize this well‐established policy‐mix taxonomy to regime‐switching models, and show that switches from monetary dominance to fiscal dominance regimes (and vice versa) render the economy indeterminate for standard parameter values. We apply our results to the important case of the exit from the zero lower bound (ZLB), where monetary policy is inherently passive. Contrary to the fixed‐regime prediction, the economy switching between the ZLB in a fiscally led regime and a monetary dominance regime is robustly indeterminate, making the coordination of agents' beliefs hard for anchoring expected inflation. Finally, we propose a direction toward which the perspective of the fiscal theory of the price level can be made consistent with a unique stable equilibrium.