Macroeconomics Seminar Series - Lukasz Rachel (UCLA)

Title: Brothers in Arms: Monetary-Fiscal Interactions Without Ricardian Equivalence

Abstract: Brothers in Arms: We derive analytical determinacy conditions and closed-form equilibrium dynamics when government debt is households' net wealth. We show that the Taylor principle is neither necessary nor sufficient for local determinacy: the active/passive distinction is replaced by a single boundary in the monetary-fiscal policy space. Transitory shocks — fiscal, monetary, and cost-push — have persistent effects transmitted over time through debt dynamics. Debt persistence is itself shaped by the policy rules. This has fundamental consequences for how policy determines the inflationary impact of shocks. It also underscores the critical role of debt maturity in driving the equilibrium dynamics.