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An Exploration of Optimal Stabilization Policy

Author

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  • N. Gregory Mankiw

    (Harvard University)

  • Matthew Weinzierl

    (Harvard University)

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. Although the model has Keynesian features, its policy prescriptions differ significantly from those of 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.)

Suggested Citation

  • N. Gregory Mankiw & Matthew Weinzierl, 2011. "An Exploration of Optimal Stabilization Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 209-272.
  • Handle: RePEc:bin:bpeajo:v:42:y:2011:i:2011-01:p:209-272
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    References listed on IDEAS

    as
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    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 20:03:00

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    Cited by:

    1. Engler, Philipp & Tervala, Juha, 2018. "Hysteresis and fiscal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 39-53.
    2. Fabio Panetta, 2016. "Central banking in the XXI century: never say never," BAFFI CAREFIN Working Papers 1626, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    3. Biolsi, Christopher, 2017. "Nonlinear effects of fiscal policy over the business cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 54-87.
    4. Michaillat, Pascal & Saez, Emmanuel, 2014. "An economical business-cycle model," LSE Research Online Documents on Economics 86332, London School of Economics and Political Science, LSE Library.
    5. Bouakez, Hafedh & Guillard, Michel & Roulleau-Pasdeloup, Jordan, 2020. "The optimal composition of public spending in a deep recession," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 334-349.
    6. Pascal Michaillat & Emmanuel Saez, 2015. "Aggregate Demand, Idle Time, and Unemployment," The Quarterly Journal of Economics, Oxford University Press, vol. 130(2), pages 507-569.
    7. Lorant Kaszab, 2016. "Rule-of-Thumb Consumers and Labor Tax Cut Policy at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 12(3), pages 353-390, September.
    8. Philippe Bacchetta & Eric van Wincoop, 2016. "The Great Recession: A Self-Fulfilling Global Panic," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 177-198, October.
    9. Jesús Fernández-Villaverde & Pablo Guerrón-Quintana & Juan F Rubio-Ramírez, 2014. "Supply-Side Policies and the Zero Lower Bound," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(2), pages 248-260, June.
    10. repec:bpj:bejmac:v:12:y:2012:i:3:p:6:n:16 is not listed on IDEAS
    11. Marco Battaglini & Stephen Coate, 2011. "Fiscal Policy and Unemployment," NBER Working Papers 17562, National Bureau of Economic Research, Inc.
    12. Sebastian Schmidt, 2013. "Optimal Monetary and Fiscal Policy with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(7), pages 1335-1350, October.
    13. Zsolt Darvas & Erkki Vihriälä, 2013. "Does the European Semester deliver the right policy advice?," Policy Contributions 793, Bruegel.
    14. 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.
    15. Schoder, Christian, 2020. "A Keynesian Dynamic Stochastic Disequilibrium model for business cycle analysis," Economic Modelling, Elsevier, vol. 86(C), pages 117-132.
    16. Ragna Alstadheim, 2013. "How New Keynesian is the US Phillips curve?," Working Paper 2013/25, Norges Bank.
    17. Michau, Jean-Baptiste, 2019. "Monetary and fiscal policy in a liquidity trap with inflation persistence," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 1-28.
    18. Thia, Jang Ping, 2020. "Deficits and crowding out through private loan spreads," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 98-107.
    19. Dmitriy Sergeyev, 2016. "Optimal Macroprudential and Monetary Policy in a Currency Union," 2016 Meeting Papers 463, Society for Economic Dynamics.
    20. Vymyatnina, Yulia V. (Вымятнина, Юлия В.) & Grishchenko, Vadim O. (Грищенко, Вадим О.) & Ostapenko, Vsevolod M. (Остапенко, Всеволод М.) & Ryazanov, Viktor T. (Рязанов, Виктор Т.), 2018. "Financial Instability and Economic Crises: Lessons from Minsky [Финансовая Нестабильность И Экономические Кризисы: Уроки Мински]," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 4, pages 20-41, August.

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    More about this item

    Keywords

    monetary policy; fiscal policy; general equilibrium model; Keynes;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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