Cheap Talk in a New Keynesian Model
This paper shows that the stance of fiscal policy does have significant impact on the conduct of monetary policy in the United States. Further, we document that the implied fiscal-monetary policy interactions are subject to regime instability, using a Markov-switching model. Then, we develop a microfoundation of regime switches using a cheap talk game between central bank and government. As a case study, we simulate the effects of regime switches within an otherwise standard New Keynesian model using the cheap talk game in the state-space of our model.
Publisher: University of Otago
Series number: 1604
Keywords: Markov-switching; Monetary and Fiscal Policy Interactions; Policy Coordination Games; Sequential Games
Research Type: Discussion Paper
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