Hostname: page-component-cd9895bd7-gvvz8 Total loading time: 0 Render date: 2024-12-26T03:52:52.459Z Has data issue: false hasContentIssue false
  • English
  • Français

POLICY GAMES, DISTRIBUTIONAL CONFLICTS, AND THE OPTIMAL INFLATION

Published online by Cambridge University Press:  11 August 2014

Alice Albonico  and
Lorenza Rossi
Alice Albonico*
Affiliation:
University of Milan Bicocca
Lorenza Rossi
Affiliation:
University of Pavia
*
Address correspondence to: Alice Albonico, Department of Economics, Management and Statistics, Piazza Ateneo Nuovo 1, 20126 Milan, Italy; e-mail: alice.albonico@unimib.it.
Get access Rights & Permissions [Opens in a new window]

Abstract

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.

Keywords

Limited Asset Market ParticipationOptimal Monetary and Fiscal PolicyStrategic InteractionInflation BiasRedistribution
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Special Issue 6: Growth, Optimal Fiscal and Monetary Policy, and Financial Frictions , September 2015 , pp. 1261 - 1293
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Adam, Klaus and Billi, Roberto M. (2008) Monetary conservatism and fiscal policy. Journal of Monetary Economics 55, 1376–1388.CrossRefGoogle Scholar
Beetsma, Roel and Jensen, Henrik (2005) Monetary and fiscal policy interactions in a micro-founded model of a monetary union. Journal of International Economics 67 (2), 320–352.CrossRefGoogle Scholar
Benabou, Roland (1992) Inflation and markups: Theories and evidence form the retail trade sector. European Economic Review 36, 566–574.CrossRefGoogle Scholar
Benigno, Pierpaolo and Woodford, Michael (2005) Inflation stabilization and welfare: The case of a distorted steady state. Journal of the European Economic Association 3 (6), 1185–1236.CrossRefGoogle Scholar
Bilbiie, Florin O. (2008) Limited asset market participation, monetary policy and (inverted) aggregate demand logic. Journal of Economic Theory 140, 162–196.CrossRefGoogle Scholar
Campbell, John Y. and Mankiw, N. Gregory (1989) Consumption, income and interest rates: Reinterpreting the time series evidence. NBER Macroeconomics Annual 4, 185–246. National Bureau of Economic Research.CrossRefGoogle Scholar
Colciago, Andrea (2011) Rule-of-thumb consumers meet sticky wages. Journal of Money, Credit and Banking 43, 325–353.CrossRefGoogle Scholar
Di Bartolomeo, Giovanni and Rossi, Lorenza (2007) Effectiveness of monetary policy and limited asset market participation: Neoclassical versus Keynesian effects. International Journal of Economic Theory 3, 213–218.CrossRefGoogle Scholar
Di Bartolomeo, Giovanni, Rossi, Lorenza, and Tancioni, Massimiliano (2011) Monetary policy, rule of thumb consumers and external habits: A G7 comparison. Applied Economics 43, 2721–2738.CrossRefGoogle Scholar
Forni, Lorenzo, Monteforte, Libero, and Sessa, Luca (2009) The general equilibrium effects of fiscal policy: Estimates for the Euro area. Journal of Public Economics 93 (3–4), 559–585.CrossRefGoogle Scholar
Furlanetto, Francesco (2011) Fiscal stimulus and the role of wage rigidity. Journal of Economic Dynamics and Control 35 (4), 512–527.CrossRefGoogle Scholar
Galí, Jordi, López-Salido, David, and Vallés, Javier (2004) Rule-of-thumb consumers and the design of interest rate rules. Journal of Money, Credit and Banking 36, 739–764.CrossRefGoogle Scholar
Galí, Jordi, López-Salido, David, and Vallés, Javier (2007) Understanding the effects of government spending on consumption. Journal of the European Economic Association 5 (1), 227–270.CrossRefGoogle Scholar
Galí, Jordi and Rabanal, Pau (2004) Technology shocks and aggregate fluctuations: How well does the RBC model fit postwar U.S. data? In Gertler, M. and Rogoff, K. (eds.), NBER Macroeconomics Annual, pp. 225–288. Cambridge, MA: MIT Press.Google Scholar
Gnocchi, Stefano (2008) Discretionary Fiscal Policy and Optimal Monetary Policy in a Currency Area. Working paper 602, Economics Department, Bologna University.Google Scholar
Muscatelli, V.Tirelli, Anton, Patrizio, and Trecroci, Carmine (2004) Fiscal and monetary policy interactions: Empirical evidence and optimal policy using a structural New-Keynesian model. Journal of Macroeconomics 26 (2), 257–280.CrossRefGoogle Scholar
Natvik, Gisle J. (2012) Government spending shocks and rule-of-thumb consumers with steady-state inequality. Scandinavian Journal of Economics 114 (4), 1414–1436.CrossRefGoogle Scholar
Rogoff, Kenneth (1985) The optimal degree of commitment to a monetary target. Quarterly Journal of Economics 100 (4), 1169–1190.CrossRefGoogle Scholar
Rotemberg, Julio J. (1982) Sticky prices in the United States. Journal of Political Economy 90, 1187–1211.CrossRefGoogle Scholar
Rotemberg, Julio J. and Woodford, Michael (1991) Markups and the business cycle. NBER Macroeconomics Annual 6, 63–129. National Bureau of Economic Research.CrossRefGoogle Scholar
Schmitt-Grohé, Stephanie and Uribe, Martin (2004a) Optimal fiscal and monetary policy under imperfect competition. Journal of Macroeconomics 26, 183–209.CrossRefGoogle Scholar
Schmitt-Grohé, Stephanie and Uribe, Martin (2004b) Optimal fiscal and monetary policy under sticky prices. Journal of Economic Theory 114, 198–230.CrossRefGoogle Scholar
Schmitt-Grohé, Stephanie and Uribe, Martin (2007) Optimal simple and implementable monetary and fiscal rules. Journal of Monetary Economics 54 (6), 1702–1725.CrossRefGoogle Scholar
Schmitt-Grohé, Stephanie and Uribe, Martin (2010) The optimal rate of inflation. In Friedman, Benjamin M. and Woodford, Michael (eds.), Handbook of Monetary Economics, 1st ed., vol. 3, pp. 653–722. Elsevier.Google Scholar