Analyzing the Interaction of Monetary and Fiscal Policy: Does Fiscal Policy Play a Valuable Role in Stabilisation?

This paper provides an overview of recent papers which use estimated New Keynesian models to study the extent to which fiscal policy can be used to stabilize the economy. We use a variety of different New Keynesian models, estimated on data for both the US and for the Euro area, and highlight the diverse transmission channels through which fiscal policy acts in these models. Although we find that fiscal policy can provide a useful complement to monetary policy, especially in models where consumers have finite horizons, there are important limitations to the value added of fiscal policy. (JEL E58, E62, E63)