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Stabilization with fiscal policy

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  • Kocherlakota, Narayana R.

Abstract

There is a long-standing consensus view that macroeconomic stabilization should rely on monetary policy, not fiscal policy. This paper reconsiders this view using an analytically tractable heterogeneous agent New Keynesian (HANK) model that is parameterized so as to admit a bubble in public debt. In this context, it is possible to stabilize either inflation or output in response to aggregate shocks by varying only fiscal policy (that is, lump-sum uniform transfers). In contrast, when the public debt bubble is large, it is impossible to stabilize either inflation or output by varying only interest rates (monetary policy).

Suggested Citation

  • Kocherlakota, Narayana R., 2022. "Stabilization with fiscal policy," Journal of Monetary Economics, Elsevier, vol. 131(C), pages 1-14.
    • Handle: RePEc:eee:moneco:v:131:y:2022:i:c:p:1-14
    DOI: 10.1016/j.jmoneco.2022.07.007
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    2. Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2018. "Monetary Policy According to HANK," American Economic Review, American Economic Association, vol. 108(3), pages 697-743, March.
    3. Sushant Acharya & Keshav Dogra, 2020. "Understanding HANK: Insights From a PRANK," Econometrica, Econometric Society, vol. 88(3), pages 1113-1158, May.
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    6. Olivier Blanchard & Jordi Galí, 2007. "Real Wage Rigidities and the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 35-65, February.
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    8. Feng Dong & Jianjun Miao & Pengfei Wang, 2020. "Asset Bubbles and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 68-98, August.
    9. Olivier J Blanchard, 2019. "Public Debt: Fiscal and Welfare Costs in a Time of Low Interest Rates," Policy Briefs PB19-2, Peterson Institute for International Economics.
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    14. Narayana R. Kocherlakota, 2023. "Public Debt Bubbles In Heterogeneous Agent Models With Tail Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 491-509, May.
    15. Christian K. Wolf, 2021. "Interest Rate Cuts vs. Stimulus Payments: An Equivalence Result," NBER Working Papers 29193, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Narayana R. Kocherlakota, 2023. "Public Debt Bubbles In Heterogeneous Agent Models With Tail Risk," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 64(2), pages 491-509, May.
    2. Swapan-Kumar Pradhan & Elod Takats & Judit Temesvary, "undated". "How does fiscal policy affect the transmission of monetary policy into cross-border bank lending? Cross-country evidence," BIS Working Papers 1226, Bank for International Settlements.
    3. Sukono & Riza Andrian Ibrahim & Moch Panji Agung Saputra & Yuyun Hidayat & Hafizan Juahir & Igif Gimin Prihanto & Nurfadhlina Binti Abdul Halim, 2022. "Modeling Multiple-Event Catastrophe Bond Prices Involving the Trigger Event Correlation, Interest, and Inflation Rates," Mathematics, MDPI, vol. 10(24), pages 1-18, December.

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    More about this item

    Keywords

    Fiscal policy; Stabilization; Heterogeneous agent; New Keynesian;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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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