Working Paper: CEPR ID: DP15199
Authors: Florin Ovidiu Bilbiie; Tommaso Monacelli; Roberto Perotti
Abstract: Stabilization and redistribution are intertwined in a model with heterogeneity, imperfect insurance, and nominal rigidity---making fiscal and monetary policy inextricably linked for aggregate-demand management. Movements in inequality induced by fiscal transfers make the flexible-price equilibrium suboptimal, thus triggering a stabilization vs redistribution tradeoff. Likewise, changes in government spending that are associated with changes in the distribution of taxes (progressive vs. regressive) induce a tradeoff for monetary policy: the central bank cannot stabilize real activity at its efficient level (including insurance) and simultaneously avoid inflation. Fiscal policy can be used in conjunction to monetary policy to strike the optimal balance between stabilization and insurance (redistribution) motives.
Keywords: inequality; redistribution; aggregate demand; fiscal transfers; optimal monetary-fiscal policy
JEL Codes: D91; E21; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal transfers (H87) | Inequality (D63) |
| Inequality (D63) | Economic efficiency (D61) |
| Fiscal transfers (H87) | Economic efficiency (D61) |
| Government spending (financed through progressive taxation) (H59) | Inequality (D63) |
| Government spending (financed through progressive taxation) (H59) | Economic efficiency (D61) |
| Fiscal policy decisions (E62) | Central bank actions (E52) |
| Central bank actions (E52) | Economic outcomes (F69) |
| Changes in government spending (H59) | Inflation (E31) |
| Changes in government spending (H59) | Output (Y10) |