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 - Policy Games, Distributional Conflicts, and the Optimal Inflation
AU - Albonico, A.
AU - Rossi, L.
PY - 2015/9/30
Y1 - 2015/9/30
N2 - 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.
AB - 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.
KW - Inflation Bias
KW - Limited Asset Market Participation
KW - Optimal Monetary and Fiscal Policy
KW - Redistribution
KW - Strategic Interaction
U2 - 10.1017/S1365100513000825
DO - 10.1017/S1365100513000825
M3 - Journal article
VL - 19
SP - 1261
EP - 1293
JO - Macroeconomic Dynamics
JF - Macroeconomic Dynamics
SN - 1365-1005
IS - 6
ER -