Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Inflation bias and markup shocks in a LAMP model with strategic interaction of monetary and fiscal policy
AU - Albonico, A.
AU - Rossi, L.
PY - 2017/6/30
Y1 - 2017/6/30
N2 - 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.
AB - 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.
KW - Inflation bias
KW - Liquidity constrained consumers
KW - Markup shocks
KW - Optimal monetary and fiscal policy
U2 - 10.1016/j.jmacro.2017.02.004
DO - 10.1016/j.jmacro.2017.02.004
M3 - Journal article
VL - 52
SP - 39
EP - 55
JO - Journal of Macroeconomics
JF - Journal of Macroeconomics
SN - 0164-0704
ER -