Optimal Monetary and Fiscal Policies in Disaggregated Economies

Lydia Cox, Jiacheng Feng, Müller, Gernot, Ernesto Pasten, Raphael Schoenle and Michael Weber
Authors registered in the RePEc Author Service: Gernot J. Müller

No 19340, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The jointly optimal monetary and fiscal policy mix in a multi-sector New Keynesian model with sectoral government spending and productivity shocks entails a separation of roles: Sectoral government spending optimally adjusts to sectoral output gaps and inflation rates---a policy supported by evidence from sectoral federal procurement data. Monetary policy optimally focuses on aggregate stabilization, but deviates from a zero-inflation target; in a model calibration to the U.S., however, it effectively approximates a zero-inflation target. Because monetary policy is a blunt instrument and government spending trades off stabilization against the optimal-level public good provision, the first best is not achieved

Keywords: Optimal; monetary; and; fiscal; policy (search for similar items in EconPapers)
JEL-codes: E62 (search for similar items in EconPapers)
Date: 2024-08
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Working Paper: Optimal Monetary and Fiscal Policies in Disaggregated Economies (2024)
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