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Inflation bias and markup shocks in a LAMP model with strategic interaction of monetary and fiscal policy

Alice Albonico () and Lorenza Rossi ()

Journal of Macroeconomics, 2017, vol. 52, issue C, 39-55

Abstract: This paper investigates the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authorities are independent and play strategically. It shows that: (i) both the long run and the short run equilibrium require a departure from zero inflation rate; (ii) in response to a markup shock, fiscal policy becomes more aggressive as the fraction of liquidity constrained agents increases and price stability is no longer optimal even under Ramsey; (iii) overall, optimal discretionary policies imply welfare losses for Ricardians, while liquidity constrained consumers experience welfare gains with respect to Ramsey.

Keywords: Inflation bias; Markup shocks; Liquidity constrained consumers; Optimal monetary and fiscal policy (search for similar items in EconPapers)
JEL-codes: E3 E5 (search for similar items in EconPapers)
Date: 2017
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Working Paper: Inflation bias and markup shocks in a LAMP model with strategic interaction of monetary and fiscal policy (2017) Downloads
Working Paper: Inflation Bias and Markup Shocks in a LAMP Model with Strategic Interaction of Monetary and Fiscal Policy (2017) Downloads
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