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Policy Games, Distributional Conflicts and the Optimal Inflation (new version)

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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 shows that Limited Asset Market Participation generates an extra inflation bias when the fiscal and the monetary authority play strategically. A fully redistributive fiscal policy eliminates the extra inflation-bias, however, the latter is cancelled at the cost of reducing Ricardians' welfare. A fiscal authority which redistributes income only partially, reduces the inflation-bias, but rises Government spending. Despite a fully conservative monetary policy is necessary to get price stability, it implies a reduction in liquidity constrained consumers' welfare, in the absence of redistributive fiscal policies. Finally, under a crisis scenario price stability cannot be ensured by Ramsey without redistribution.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0031.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 031.

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Length: 36 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:pav:demwpp:031

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Related research

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

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