Stabilization vs. Redistribution: the Optimal Monetary-Fiscal Mix

Florin Bilbiie, Tommaso Monacelli and Roberto Perotti

No 15199, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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; Tank (search for similar items in EconPapers)
JEL-codes: D91 E21 E62 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-dge, nep-ias, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Stabilization vs. Redistribution: The optimal monetary–fiscal mix (2024)
Working Paper: Stabilization vs. Redistribution: The Optimal Monetary-Fiscal Mix (2024)
Working Paper: Stabilization vs. Redistribution: The Optimal Monetary-Fiscal Mix (2024)
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