Working Paper: NBER ID: w30706
Authors: Jing Cynthia Wu; Yinxi Xie
Abstract: We build a tractable New Keynesian model to jointly study four types of monetary and fiscal policy. We find quantitative easing (QE), lump-sum fiscal transfers, and government spending have the same effects on the aggregate economy when fiscal policy is fully tax financed. Compared with these three policies, conventional monetary policy is more inflationary for the same amount of stimulus. QE and transfers have redistribution consequences, whereas government spending and conventional monetary policy do not. Ricardian equivalence breaks: tax-financed fiscal policy is more stimulative than debt-financed policy. Finally, we study optimal policy coordination and find that adjusting two types of policy instruments, the policy rate together with QE or fiscal transfers, can stabilize three targets simultaneously: inflation, the aggregate output gap, and cross-sectional consumption dispersion.
Keywords: No keywords provided
JEL Codes: E5; E62; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax-financed fiscal policy (E62) | Aggregate demand and supply (E00) |
| Lump-sum fiscal transfers (H39) | Aggregate demand and supply (E00) |
| Government spending (H59) | Aggregate demand and supply (E00) |
| Conventional monetary policy (E52) | Inflation (E31) |
| Quantitative easing (QE) (C54) | Inflation (E31) |
| Tax-financed fiscal policy (E62) | Inflation (E31) |
| Quantitative easing (QE) (C54) | Wealth redistribution from unconstrained to constrained households (H31) |
| Tax-financed fiscal transfers (H29) | Wealth redistribution from unconstrained to constrained households (H31) |
| Government spending (H59) | Wealth redistribution from unconstrained to constrained households (H31) |
| Tax-financed fiscal policy (E62) | Stimulation of the economy (E65) |
| Debt-financed policy (H69) | Neutral effects due to contractionary effects of debt issuance (E62) |