Marcus Hagedorn, Kurt Mitman, 15 May 2020

Heterogeneous-Agent New Keynesian models offer new perspectives on fiscal and monetary policy interaction in the euro area. The current question is whether ECB measures are predominantly motivated to ensure price stability (with fiscal consequences a side effect), or whether they are motivated by an overriding economic policy objective. This column presents evidence that, according to the HANK models, there is no distinct separation between fiscal and monetary policy. Fiscal policy is an important determinant of inflation at the zero lower bound, and properly designed asset purchases are an effective instrument to satisfy the price stability mandate.

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