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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 fi?nitely-lived consumers and government 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 affects the household?s propensity to consume out ?financial wealth. Debt stabilization bias implies that discretionary optimal policy is suboptimal compared with the infl?ation targeting rule that fully stabilizes the output gap and the in?flation rate while leaving debt to freely fl?uctuate 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)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2017-12
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http://www.bbk.ac.uk/ems/research/BirkCAM/working-papers/BCAM1708.pdf First version, 2017 (application/pdf)

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