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Inflation bias and markup shocks in a LAMP model with strategic interaction of monetary and fiscal policy

Listed author(s):
  • Alice, Albonico
  • Lorenza, Rossi

This paper investigates the effects generated by limited asset market participation on optimal monetary and fiscal policy, where monetary and fiscal authorities are independent and play strategically. It shows that: (i) both the long run and the short run equilibrium require a departure from zero inflation rate; (ii) in response to a markup shock, fiscal policy becomes more aggressive as the fraction of liquidity constrained agents increases and price stability is no longer optimal even under Ramsey; (iii) overall, optimal discretionary policies imply welfare losses for Ricardians, while liquidity constrained consumers experience welfare gains with respect to Ramsey.

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File URL: http://dems.unimib.it/repec/pdf/mibwpaper362.pdf
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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 362.

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Length: 36
Date of creation: 14 Feb 2017
Date of revision: 14 Feb 2017
Handle: RePEc:mib:wpaper:362
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  19. repec:fth:harver:1435 is not listed on IDEAS
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  33. Greg Kaplan & Giovanni L. Violante & Justin Weidner, 2014. "The Wealthy Hand-to-Mouth," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 45(1 (Spring), pages 77-153.
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