Working Paper: NBER ID: w17029
Authors: N. Gregory Mankiw; Matthew C. Weinzierl
Abstract: This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand. The theoretical framework is a two-period general equilibrium model in which prices are sticky in the short run and flexible in the long run. Policy is evaluated by how well it raises the welfare of the representative household. While the model has Keynesian features, its policy prescriptions differ significantly from textbook Keynesian analysis. Moreover, the model suggests that the commonly used "bang for the buck" calculations are potentially misleading guides for the welfare effects of alternative fiscal policies.
Keywords: No keywords provided
JEL Codes: E52; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in private consumption (D12) | Reduction in public consumption (H49) |
| Increasing government purchases (H59) | Stimulate aggregate demand (E00) |
| Optimal fiscal policy (E62) | Replicate resource allocation of flexible prices (C59) |
| Fiscal policy should align with classical principles (E62) | Welfare of a representative household (D69) |