Inflation vs Inclusion: Stabilization Policy in the Wake of the Pandemic

Felipe Alves and Giovanni Violante

No 34894, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: As the economy emerges from a crisis, macroeconomic policy confronts a dilemma: a protracted stimulus can foster a more inclusive labor market recovery, yet risks igniting inflation that ultimately undermines workers’ welfare through real income erosion. This tension amplifies in the presence of the ZLB and aggregate capacity constraints. We embed this insight into a quantitative model of the US economy. We study how monetary and fiscal policies managed this inflation-inclusion trade-off after the pandemic, contrasting actual outcomes with counterfactual scenarios. Our experiments yield five findings: (i) the trade-off was unusually difficult because policy was squeezed between these two constraints; (ii) inflationary pressures arose from the joint deployment of prolonged monetary and fiscal stimulus; either policy alone would have produced milder price dynamics; (iii) either inclusive fiscal policy or inclusive monetary policy in isolation would have been sufficient to contain the negative labor market hysteresis at the bottom of the distribution; (iv) inclusive fiscal policy combined with a more traditionally inflation-focused central bank would have achieved higher welfare for the vast majority of households; (v) welfare effects reflect mostly corrections of incomplete-market inefficiencies rather than gains from aggregate stabilization.

JEL-codes: E21 E24 E31 E32 J24 J30 J64 (search for similar items in EconPapers)
Date: 2026-02
Note: EFG ME
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