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Policy Games with Distributional Conflicts

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Author Info

  • Alice Albonico

    () (Department of Economics and Management, University of Pavia)

  • Lorenza Rossi

    () (Department of Economics and Management, University of Pavia)

Abstract

This paper studies the effects generated by limited asset market participation under different fiscal and monetary policy games. We find that the distributional conflict due to limited asset market participation rises the inflation bias when the two authorities are independent and play strategically. A fully redistributive fiscal policy eliminates the extra inflation bias. However, the latter is cancelled at the cost of strongly reducing the Ricardian welfare in terms of consumption equivalents. A partial redistributive fiscal policy is able to reduce the inflation bias, but generates a strong Government bias. Finally, despite a fully conservative monetary policy is necessary to get price stability, it still implies a very strong reduction in liquidity constrained consumers welfare, in the absence of a redistributive fiscal policy. The model also implies some interesiting results when simulating a financial crisis scenario.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0026.pdf
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Bibliographic Info

Paper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 026.

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Length: 49 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:pav:demwpp:026

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Related research

Keywords: liquidity constrained consumers; optimal monetary and fiscal policy; strategic interaction; inflation bias.;

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