Optimal Monetary Policy and Fiscal Policy Interaction in a non-Ricardian Economy

Massimiliano Rigon () and Francesco Zanetti

No 1708, BCAM Working Papers from Birkbeck Centre for Applied Macroeconomics

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.

Keywords: Optimal monetary policy; ?fiscal and monetary policy interaction. (search for similar items in EconPapers)
JEL-codes: E52 E63 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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https://eprints.bbk.ac.uk/26713/1/26713.pdf First version, 2017 (application/pdf)

Related works:
Journal Article: Optimal Monetary Policy and Fiscal Policy Interaction in a Non-Ricardian Economy (2018)
Working Paper: Optimal monetary policy and fiscal interactions in a non-Ricardian economy (2017)
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