Jointly Optimal Monetary and Fiscal Policy Rules under Borrowing Constraints

December 1, 2009

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Format: Chicago

Michael Kumhof, and Huixin Bi. Jointly Optimal Monetary and Fiscal Policy Rules under Borrowing Constraints, (USA: International Monetary Fund, 2009) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

We study the welfare properties of an economy where both monetary and fiscal policy follow simple rules, and where a subset of agents is borrowing constrained. The optimized fiscal rule is far more aggressive than automatic stabilizers, and stabilizes the income of borrowingconstrained agents, rather than output. The optimized monetary rule features super-inertia and a very low coefficient on inflation, which minimizes real wage volatility. The welfare gains of optimizing the fiscal rule are far larger than the welfare gains of optimizing the monetary rule. The preferred fiscal instruments are government spending and transfers targeted to borrowing-constrained agents.

Subject: Consumption, Fiscal policy, Fiscal rules, Labor supply, Revenue administration

Keywords: Output gap, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/286
Stock No:

WPIEA2009286
ISBN:

9781451874310
ISSN:

1018-5941

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