Stabilization with fiscal policy

Narayana Kocherlakota

Journal of Monetary Economics, 2022, vol. 131, issue C, 1-14

Abstract: There is a long-standing consensus view that macroeconomic stabilization should rely on monetary policy, not fiscal policy. This paper reconsiders this view using an analytically tractable heterogeneous agent New Keynesian (HANK) model that is parameterized so as to admit a bubble in public debt. In this context, it is possible to stabilize either inflation or output in response to aggregate shocks by varying only fiscal policy (that is, lump-sum uniform transfers). In contrast, when the public debt bubble is large, it is impossible to stabilize either inflation or output by varying only interest rates (monetary policy).

Keywords: Fiscal policy; Stabilization; Heterogeneous agent; New Keynesian (search for similar items in EconPapers)
JEL-codes: E58 E62 E63 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:131:y:2022:i:c:p:1-14

DOI: 10.1016/j.jmoneco.2022.07.007

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