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An Exploration of Optimal Stabilization Policy

Matthew Weinzierl (), Gauti Eggertsson (), Olivier Blanchard () and N. Gregory Mankiw ()

Scholarly Articles from Harvard University Department of Economics

Abstract: This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand. The theoretical framework is a two-period general equilibrium model in which prices are sticky in the short run and flexible in the long run. Policy is evaluated by how well it raises the welfare of the representative household. Although the model has Keynesian features, its policy prescriptions differ significantly from those of textbook Keynesian analysis. Moreover, the model suggests that the commonly used “bang for the buck†calculations are potentially misleading guides for the welfare effects of alternative fiscal policies.

Date: 2011
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Published in Brookings Papers on Economic Activity

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