Working Paper: CEPR ID: DP3730
Authors: Isabel Horta Correia; Juan Pablo Nicolini; Pedro Teles
Abstract: In this Paper, we analyse the implications of price setting restrictions for the conduct of cyclical fiscal and monetary policy. We consider an environment with monopolistic competitive firms, a shopping time technology, prices set one period in advance, and government expenditures that must be financed with distortionary taxes. We show that the sets of (frontier) implementable allocations are the same independent of the degree of price stickiness. Furthermore, the sets of policies that decentralize each allocation are also the same except in the extreme cases of flexible and sticky prices, where the sets are larger.
Keywords: optimal fiscal and monetary policy; sticky prices
JEL Codes: E31; E40; E52; E58; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| price rigidity (D41) | policy effectiveness (D78) |
| price setting (L11) | policy outcomes (D78) |
| fiscal policy under sticky prices (E63) | outcomes under flexible prices (P22) |
| monetary policy (E52) | price rigidity (D41) |
| consumption and labor income taxes (H31) | state-contingent debt (H74) |