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Optimal Monetary and Fiscal Policies in Disaggregated Economies

Author

Listed:
  • Lydia Cox
  • Jiacheng Feng
  • Gernot J. Müller
  • Ernesto Pastén
  • Raphael Schoenle
  • Michael Weber

Abstract

The jointly optimal monetary and fiscal policy mix in a multi-sector New Keynesian model with sectoral government spending and productivity shocks entails a separation of roles: Sectoral government spending optimally adjusts to sectoral output gaps and inflation rates—a policy supported by evidence from sectoral federal procurement data. Monetary policy optimally focuses on aggregate stabilization, but deviates from a zero-inflation target; in a model calibration to the U.S., however, it effectively approximates a zero-inflation target. Because monetary policy is a blunt instrument and government spending trades off stabilization against the optimal-level public good provision, the first best is not achieved.

Suggested Citation

  • Lydia Cox & Jiacheng Feng & Gernot J. Müller & Ernesto Pastén & Raphael Schoenle & Michael Weber, 2024. "Optimal Monetary and Fiscal Policies in Disaggregated Economies," Working Papers Central Bank of Chile 1024, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:1024
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