Stabilization with Fiscal Policy

Narayana Kocherlakota

No 29226, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: I reconsider the long-standing consensus view that macroeconomic stabilization should rely on monetary policy, not fiscal policy. I use an analytically tractable heterogeneous agent New Keynesian (HANK) model that is parameterized so as to admit a bubble in public debt. In this context, I show that 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).

JEL-codes: E58 E62 E63 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-isf and nep-mac
Note: EFG ME
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Published as Narayana R. Kocherlakota, 2022. "Stabilization with Fiscal Policy," Journal of Monetary Economics, .

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