Inflation Bias and Markup Shocks in a LAMP Model with Strategic Interaction of Monetary and Fiscal Policy

Alice Albonico and Lorenza Rossi

No 133, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: This paper investigates the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authorities are independent and play strategically. It shows that: (i) both the long run and the short run equilibrium require a departure from zero inflation rate; (ii) in response to a markup shock, fiscal policy becomes more aggressive as the fraction of liquidity constrained agents increases and price stability is no longer optimal even under Ramsey; (iii) overall, optimal discretionary policies imply welfare losses for Ricardians, while liquidity constrained consumers experience welfare gains with respect to Ramsey.

Keywords: inflation bias; markup shocks; liquidity constrained consumers; optimal monetary and fiscal policy (search for similar items in EconPapers)
JEL-codes: E3 E5 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2017-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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http://dem-web.unipv.it/web/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0133.pdf (application/pdf)

Related works:
Journal Article: Inflation bias and markup shocks in a LAMP model with strategic interaction of monetary and fiscal policy (2017)
Working Paper: Inflation bias and markup shocks in a LAMP model with strategic interaction of monetary and fiscal policy (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pav:demwpp:demwp0133

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