Optimal Monetary and Fiscal Policies in Disaggregated Economies

Lydia Cox, Jiacheng Feng, Gernot Müller, Ernesto Pasten, Raphael Schoenle and Michael Weber

No 32914, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2024-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ipr, nep-mac and nep-mon
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