Working Paper: NBER ID: w29226
Authors: Narayana R. Kocherlakota
Abstract: I reconsider the long-standing consensus view that macroeconomic stabilization should rely on monetary policy, not fiscal policy. I use an analytically tractable heterogeneous agent New Keynesian (HANK) model that is parameterized so as to admit a bubble in public debt. In this context, I show that it is possible to stabilize either inflation or output in response to aggregate shocks by varying only fiscal policy (that is, lump-sum uniform transfers). In contrast, when the public debt bubble is large, it is impossible to stabilize either inflation or output by varying only interest rates (monetary policy).
Keywords: No keywords provided
JEL Codes: E58; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy (uniform lump-sum transfers) (H39) | Macroeconomic stabilization (E63) |
| Public debt bubble (H63) | Ineffectiveness of monetary policy adjustments (E49) |
| Current transfers (without a public debt bubble) (H69) | Future fiscal adjustments (tax increases or spending cuts) (E62) |
| Public debt bubble (H63) | Current and future demand (J23) |