Policy Games, Distributional Conflicts and the Optimal Inflation (new version)

Alice Albonico and Lorenza Rossi

No 31, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: This paper shows that Limited Asset Market Participation generates an extra inflation bias when the fiscal and the monetary authority play strategically. A fully redistributive fiscal policy eliminates the extra inflation-bias, however, the latter is cancelled at the cost of reducing Ricardians' welfare. A fiscal authority which redistributes income only partially, reduces the inflation-bias, but rises Government spending. Despite a fully conservative monetary policy is necessary to get price stability, it implies a reduction in liquidity constrained consumers' welfare, in the absence of redistributive fiscal policies. Finally, under a crisis scenario price stability cannot be ensured by Ramsey without redistribution.

Keywords: liquidity constrained consumers; optimal monetary and fiscal policy; strategic interaction; inflation bias; redistribution. (search for similar items in EconPapers)
JEL-codes: E3 E5 E62 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2013-11
New Economics Papers: this item is included in nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:pav:demwpp:031

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