May 4 - 5, 2026
Graduate Center Masterclasses
Monetary and Fiscal Interactions
Date
May 4 - 5, 202604.05.: 10
a.m.-1 p.m. and 2-5 p.m.
05.05.: 10
a.m.-1 p.m.
Location
Karl Popper RoomDIW BerlinRoom 2.3.020Anton-Wilhelm-Amo-Strasse 5810117 BerlinSpeakers
Leonardo Melosi (European University Institute)Public debt has reached historically high levels in many advanced economies and continues to grow at an unprecedented pace. This development has brought questions of fiscal sustainability, macroeconomic stability, and the appropriate conduct of monetary and fiscal policy to the forefront of policy debates worldwide.
This five-lecture course investigates the mechanisms and conditions under which large public debt gives rise to macroeconomic instability, using dynamic stochastic general equilibrium (DSGE) models as a unified analytical framework. Within this framework, we examine the constraints, trade-offs, and credibility issues faced by monetary authorities when public debt is both large and persistent. We analyze alternative regimes of monetary–fiscal interaction and assess how different forms of policy coordination can stabilize public debt dynamics, with particular emphasis on their implications for inflation and output growth.
The course devotes special attention to the challenges of fiscal policy coordination in a monetary union, where national fiscal authorities operate under a common monetary policy, as in the European Union. Building on these theoretical insights, we then confront the models with empirical evidence, highlighting the role of fiscal–monetary interactions in shaping inflation dynamics over the postwar period. Finally, we apply the framework to contemporary policy challenges, discussing how monetary and fiscal authorities in the United States and the euro area can respond to the legacy of the large public debt accumulated in the aftermath of the COVID-19 pandemic.
Course Outline
- Fiscal Imbalances and Monetary Policy in the XXI Century
- Monetary and fiscal dominance in DSGE models
- DSGE models with regime switching to study
(a) Lack of coordination between monetary and fiscal policies
(b) Learning the policy mix - Monetary and fiscal policy mix in a monetary union
- Models with partially unfunded debt
References
Bassetto, M. (2002): A Game-Theoretic View of the Fiscal Theory of the Price Level, Econometrica, 70(6), 2167 2195.
Bianchi, F., Faccini, R., and L. Melosi (2020): Monetary and Fiscal Policies in Times of Large Debt: Unity is Strength, in NBER Working Papers # 27112. National Bureau of Economic Research, Inc.
-- (2023): A Fiscal Theory of Persistent Inflation, Quarterly Journal of Economics, 138(4), 2127–2179.
Bianchi, F., and C. Ilut (2017): Monetary/Fiscal Policy Mix and Agents Beliefs, Review of Economic Dynamics, 26, 113 139.
Bianchi, F., and L. Melosi (2013): Dormant Shocks and Fiscal Virtue, in NBER Macroeconomics Annual 2013, Volume 28, NBER Chapters, pp. 1 46. National Bureau of Economic Research, Inc.
-- (2017): Escaping the Great Recession, American Economic Review, 107(4), 1030 58.
-- (2019): The dire effects of the lack of monetary and fiscal coordination, Journal of Monetary Economics, 104, 1 22.
Bianchi, F., Melosi L., A. Rogantini-Picco (2020): Who is Afraid of Eurobonds, Mimeo.
Christiano, L. J., M. Eichenbaum, and C. L. Evans (2005): Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy, Journal of Political Economy, 113(1), 1 45.
Cochrane, J. H. (1998): A Frictionless Model of U.S. In ation, in NBER Macroeconomics Annual 1998, ed. by B. S. Bernanke, and J. J. Rotemberg, pp. 323 384. MIT Press, Cambridge, MA.
-- (2001): Long Term Debt and Optimal Policy in the Fiscal Theory of the Price Level, Econometrica, 69, 69 116.
Hall, G. J., and T. J. Sargent (2011): Interest Rate Risk and Other Determinants of Post-WWII U.S. Government Debt/GDP Dynamics, American Economic Journal: Macroeconomics, 3(3), 192 214.
Jacobson, M. M., E. M. Leeper, and B. Preston (2019): Recovery of 1933, NBER Working Papers 25629, National Bureau of Economic Research, Inc.
Leeper, E. M. (1991): Equilibria Under Active and Passive Monetary and Fiscal Policies, Journal of Monetary Economics, 27, 129 147.
Leeper, E. M., N. Traum, and T. B. Walker (2017): Clearing Up the Fiscal Multiplier Morass, American Economic Review, 107(8), 2409 2454.4
Sargent, T., and N. Wallace (1981): Some Unpleasant Monetarist Arithmetic, Federal Reserve Bank of Minneapolis Quarterly Review, Fall, 1 17.
Sims, C. A. (1994): A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy, Economic Theory, 4, 381 399.
Sims, C. A. (2016): Fiscal policy, monetary policy and central bank independence, in Kansas City Fed Jackson Hole Conference.
Woodford, M. (1994): Monetary Policy and Price Level Determinacy in a Cash-in Advance Economy, Economic Theory, 4, 345 389.
-- (1995): Price Level Determinacy without Control of a Monetary Aggregate, Carnegie-Rochester Series of Public Policy, 43, 1 46.
-- (2001): Fiscal Requirements of Price Stability, Journal of Money, Credit, and Banking, 33, 669 728.
-- (2003): Interest and prices: Foundations of a theory of monetary policy. Princeton University Press, Princeton, New Jersey.
About the speaker
Leonardo Melosi is Professor of Economics at the European University Institute (EUI) and a Research Fellow of the Centre for Economic Policy Research (CEPR). Before joining the EUI, he was Professor of Economics at the University of Warwick. He previously served as Senior Economist, Economic Advisor, and Executive Director of the Center for Applied Macroeconomic Research in the Economic Research Department of the Federal Reserve Bank of Chicago. Earlier in his career, he was Assistant Professor at the London Business School.
Melosi serves as an Associate Editor for the Journal of Monetary Economics and the Journal of Applied Econometrics and is a member of the Board of Editors of Lavoce.info. He has also held visiting positions at Northwestern University and Columbia University. In 2025, he was appointed Research Fellow at the Bank for International Settlements (BIS), following previous fellowships at the European Central Bank (as a Wim Duisenberg Fellow) and the Bank of England (as a Houblon-Norman Fellow).
He has published articles in leading peer-reviewed journals, including the American Economic Review, Quarterly Journal of Economics, Review of Economic Studies, Review of Economics and Statistics, American Economic Journal: Macroeconomics, the Journal of Monetary Economics, and the NBER Macroeconomics Annual.
He holds a B.A. in Economics from LUISS University in Rome, an M.Sc. in International Economics from the Graduate Institute of International and Development Studies in Geneva, and both an M.A. and a Ph.D. in Economics from the University of Pennsylvania.
Registration and ECTS
This masterclass is suitable for interested researchers, in particular PhD students. Participation is free. If you want to join this masterclass, please register with the Graduate Center on a first-come, first-served basis: gradcenter@diw.de
We award 2 ECTS for the successful completion of the masterclass.
Topics: From the institute
