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    Optimal monetary policy and fiscal policy interaction in a non-Ricardian Economy

    Rigon, M. and Zanetti, F. (2017) Optimal monetary policy and fiscal policy interaction in a non-Ricardian Economy. Working Paper. Birkbeck, University of London, London, UK.

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    Abstract

    This paper studies optimal discretionary monetary policy and its interaction with fiscal policy in a New Keynesian model with finitely-lived consumers and gov- ernment debt. Optimal discretionary monetary policy involves debt stabilization to reduce consumption dispersion across cohorts of consumers. The welfare relevance of debt stabilization is proportional to the debt-to-output ratio and inversely related to the household's probability of survival that a¤ects the household's propensity to consume out financial wealth. Debt stabilization bias implies that discretionary optimal policy is suboptimal compared with the inflation targeting rule that fully stabilizes the output gap and the inflation rate while leaving debt to freely fluctuate in response to demand shocks.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BCAM 1708; ISSN 1745-8587
    Keyword(s) / Subject(s): Optimal monetary policy, fiscal and monetary policy interaction
    School: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centres and Institutes: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Administrator
    Date Deposited: 21 Mar 2019 16:22
    Last Modified: 22 Jul 2020 01:33
    URI: https://eprints.bbk.ac.uk/id/eprint/26713

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