will give a presentation on:
Abstract:
What does Central Bank independence imply for government debt management in a liquidity trap? To provide an answer, I study a stochastic noncooperative game between fiscal and monetary policy when demand shocks occasionally trigger zero bound episodes on the nominal rate. When government debt is short-term, the optimal time-consistent response implies a decrease in debt and a fiscal stimulus financed with labor taxes, a result which differs qualitatively from the coordinated outcome. The reason is the “leaning against the wind” policy of the Central Bank which makes expected future tax cuts stimulative for current consumption. Increasing the debt maturity allows to coordinate somewhat uncoordinated policies.
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