Optimal monetary and transfer policy in a liquidity trap

Stefano Maria Corbellini

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: Optimal monetary and fiscal policy are jointly analyzed in a heterogeneous two-agents New Keynesian environment, where fiscal policy is modeled in the form of lump-sum transfers set by the government. The main result is that transfer policy does not serve as a substitute for forward guidance - as it entails consumption dispersion costs - and does not affect its optimal duration. Transfers indeed influence the length of stay at the zero lower bound through two offsetting channels: a shortening channel works through an initial increase in transfers that mitigates the recession (reducing the need for forward guidance), and a lengthening channel works through a later transfer cut that curbs the undesired expansion (making forward guidance desirable for a longer horizon). Imposing a homogeneous transfer policy across agents does not change the stabilization outcome or the effect on the duration of forward guidance, nor does so allowing for cyclical income differences.

Keywords: heterogeneity; inequality; liquidity trap; optimal monetary policy; optimal fiscal policy; forward guidance (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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