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Pareto Improving Fiscal and Monetary Policies: Samuelson in the New Keynesian Model

Author

Listed:
  • Mark A. Aguiar
  • Manuel Amador
  • Cristina Arellano

Abstract

This paper explores the positive and normative consequences of government bond issuances in a New Keynesian model with heterogeneous agents, focusing on how the stock of government bonds affects the cross-sectional allocation of resources in the spirit of Samuelson (1958). We characterize the Pareto optimal levels of government bonds and the associated monetary policy adjustments that should accompany Pareto-improving bond issuances. The paper introduces a simple phase diagram to analyze the global equilibrium dynamics of inflation, interest rates, and labor earnings in response to changes in the stock of government debt. The framework also provides a tractable tool to explore the use of fiscal policy to escape the Effective Lower Bound (ELB) on nominal interest rates and the resolution of the “forward guidance puzzle.” A common theme throughout is that following the monetary policy guidance from the standard Ricardian framework leads to excess fluctuations in income and inflation.

Suggested Citation

  • Mark A. Aguiar & Manuel Amador & Cristina Arellano, 2023. "Pareto Improving Fiscal and Monetary Policies: Samuelson in the New Keynesian Model," NBER Working Papers 31297, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31297
    Note: EFG IFM ME
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    Cited by:

    1. George‐Marios Angeletos & Chen Lian & Christian K. Wolf, 2024. "Can Deficits Finance Themselves?," Econometrica, Econometric Society, vol. 92(5), pages 1351-1390, September.
    2. Rodolfo G. Campos & Jesús Fernández-Villaverde & Galo Nuño & Peter Paz, 2024. "Navigating by Falling Stars: Monetary Policy with Fiscally Driven Natural Rates," NBER Working Papers 32219, National Bureau of Economic Research, Inc.
    3. Sergi Barcons & Eduardo D‡vila & Andreas Schaab, 2025. "Intergenerational Welfare Assessments," Cowles Foundation Discussion Papers 2427, Cowles Foundation for Research in Economics, Yale University.

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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