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An Exploration of Optimal Stabilization Policy

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Author Info

  • N. Gregory Mankiw
  • Matthew 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.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 42 (2011)
Issue (Month): 1 (Spring) ()
Pages: 209-272

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Handle: RePEc:bin:bpeajo:v:42:y:2011:i:2011-01:p:209-272

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Related research

Keywords: monetary policy; fiscal policy; general equilibrium model; Keynes;

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References

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  1. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  2. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  3. Emmanuel Farhi & Isabel Correia & Juan Pablo Nicolini & Pedro Teles, . "Unconventional Fiscal Policy at the Zero Bound," Working Paper 20945, Harvard University OpenScholar.
  4. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
  5. Gauti Eggertsson, 2010. "The paradox of toil," Staff Reports 433, Federal Reserve Bank of New York.
  6. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. What is a sticky price?
    by Economic Logician in Economic Logic on 2011-06-23 15:03:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:
  1. Jesús Fernández-Villaverde & Pablo Guerrón-Quintana & Juan F. Rubio-Ramírez, 2011. "Supply-side policies and the zero lower bound," Working Papers 11-47, Federal Reserve Bank of Philadelphia.
  2. Kaszab, Lorant, 2012. "Rule-of-Thumb Consumers and Labor Tax Cut Policy in the Zero Lower Bound," Cardiff Economics Working Papers E2012/13, Cardiff University, Cardiff Business School, Economics Section, revised Apr 2013.
  3. Bacchetta, Philippe & van Wincoop, Eric, 2013. "The Great Recession: A Self-Fulfilling Global Panic," CEPR Discussion Papers 9487, C.E.P.R. Discussion Papers.
  4. Marco Battaglini & Stephen Coate, 2011. "Fiscal Policy and Unemployment," NBER Working Papers 17562, National Bureau of Economic Research, Inc.
  5. J. Bradford DeLong & Lawrence H. Summers, 2012. "Fiscal Policy in a Depressed Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 233-297.
  6. Zsolt Darvas & Erkki Vihriälä, 2013. "Does the European Semester deliver the right policy advice?," Policy Contributions 793, Bruegel.

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  1. Economic Logic blog

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