Staff Memo: Monetary-fiscal interactions when Ricardian equivalence fails
When Ricardian equivalence applies, the interaction between monetary and fiscal policy is limited. However, when the equivalence is broken, for example due to household liquidity constraints or fiscal dominance, a clear pattern emerges. Supply shocks lead to larger fluctuations in inflation and smaller output effects, while demand shocks produce larger real fluctuations. Distorting taxes are another factor that can break Ricardian equivalence, for example it is shown that increases in consumption taxes can be more contractionary for output than equally large increases in taxes on labour income.
Read more about this analysis in the Staff Memo: “Monetary-fiscal interactions when Ricardian equivalence fails” by Magnus Jonsson and Anders Vredin.
Staff Memos
A Staff Memo provides Riksbank staff members with the opportunity to publish ad-vanced analyses of relevant issues. It is a staff publication, free of policy conclusions and individual standpoints on current policy issues. Publication is approved by the head of department concerned. The opinions expressed in Staff Memos are those of the authors and should not be regarded as the Riksbank’s standpoint.