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Stabilization vs. Redistribution: The Optimal Monetary-Fiscal Mix

Author

Listed:
  • Bilbiie, F. O.
  • Monacelli, T.
  • Perotti, R.

Abstract

Stabilization and redistribution are intertwined in a model with heterogeneity, imperfect insurance, and nominal rigidity-making fiscal and monetary policy inextricably linked for aggregate-demand management. Movements in inequality induced by fiscal transfers make the flexible-price equilibrium suboptimal, thus triggering a stabilization vs redistribution tradeoff. Likewise, changes in government spending that are associated with changes in the distribution of taxes (progressive vs. regressive) induce a tradeoff for monetary policy: the central bank cannot stabilize real activity at its efficient level (including insurance) and simultaneously avoid inflation. Fiscal policy can be used in conjunction to monetary policy to strike the optimal balance between stabilization and insurance (redistribution) motives.

Suggested Citation

  • Bilbiie, F. O. & Monacelli, T. & Perotti, R., 2024. "Stabilization vs. Redistribution: The Optimal Monetary-Fiscal Mix," Cambridge Working Papers in Economics 2436, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:2436
    Note: fob21, florin bilbiie
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    Cited by:

    1. Bellifemine, Marco & Couturier, Adrien & Jamilov, Rustam, 2025. "Monetary unions with heterogeneous fiscal space," Journal of International Economics, Elsevier, vol. 156(C).
    2. Central Bank of Chile, 2025. "Firm and household heterogeneity at the Central Bank of Chile," BIS Papers chapters, in: Bank for International Settlements (ed.), How can central banks take account of differences across households and firms for monetary policy?, volume 127, pages 45-62, Bank for International Settlements.
    3. Drago Bergholt & Øistein Røisland & Tommy Sveen & Ragnar Torvik, 2025. "Should Monetary And Fiscal Policy Pull In The Same Direction?," Working Papers No 06/2025, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
    4. Xing Guo & Pablo Ottonello & Diego J. Perez, 2023. "Monetary Policy and Redistribution in Open Economies," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 1(1), pages 191-241.
    5. Tian, Hanhui & Wang, Chenxi & Zhang, Chengsi, 2025. "The effects of fiscal stimulus under monetary accommodation," Journal of Macroeconomics, Elsevier, vol. 85(C).
    6. Cox, Lydia & Feng, Jiacheng & Müller, Gernot & Pasten, Ernesto & Schoenle, Raphael & Weber, Michael, 2024. "Optimal Monetary and Fiscal Policies in Disaggregated Economies," CEPR Discussion Papers 19340, C.E.P.R. Discussion Papers.
    7. Altavilla, Carlo & Bussière, Matthieu & Galí, Jordi & Gorodnichenko, Yuriy & Gürkaynak, Refet S. & Rey, Hélène, 2024. "A research program on monetary policy for Europe," Journal of Monetary Economics, Elsevier, vol. 147(S).
    8. Bellifemine, Marco & Couturier, Adrien & Jamilov, Rustam, 2025. "Monetary unions with heterogeneous fiscal space," LSE Research Online Documents on Economics 128186, London School of Economics and Political Science, LSE Library.
    9. Stephany Griffith-Jones & Mario Giarda & Jorge Arenas, 2025. "Firm and household heterogeneity at the Central Bank of Chile," Economic Policy Papers Central Bank of Chile 75, Central Bank of Chile.
    10. Stefano Maria Corbellini, 2022. "Optimal monetary and transfer policy in a liquidity trap," Diskussionsschriften dp2216, Universitaet Bern, Departement Volkswirtschaft.

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    Keywords

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    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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