Home > Research > Publications & Outputs > Policy Games, Distributional Conflicts, and the...
View graph of relations

Policy Games, Distributional Conflicts, and the Optimal Inflation

Research output: Contribution to Journal/MagazineJournal articlepeer-review

<mark>Journal publication date</mark>30/09/2015
<mark>Journal</mark>Macroeconomic Dynamics
Issue number6
Number of pages33
Pages (from-to)1261-1293
Publication StatusPublished
Early online date11/08/14
<mark>Original language</mark>English


This paper shows that limited asset-market participation (LAMP) generates an extra inflation bias when the fiscal and the monetary authority play strategically. A fully redistributive fiscal policy eliminates the extra inflation bias, but at the cost of reducing Ricardians' welfare. A fiscal authority that redistributes income only partially reduces the inflation bias, but raises government spending. Although a fully conservative monetary policy is necessary to get price stability, it implies a reduction in liquidity-constrained consumers' welfare, in the absence of redistributive fiscal policies. Finally, under a crisis scenario, none of the policy regimes is able to avoid the fall in economic activity when the increase in the fraction of LAMP is coupled with a negative technology shock, whereas optimal policy can avoid recession when it responds to the increase in LAMP proportion alone.