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Optimal Monetary and Fiscal Policies in Disaggregated Economies

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  • Lydia Cox
  • Jiacheng Feng
  • Gernot 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 Müller & Ernesto Pastén & Raphael Schoenle & Michael Weber, 2024. "Optimal Monetary and Fiscal Policies in Disaggregated Economies," NBER Working Papers 32914, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32914
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    1. Anton I. Votinov & Julia A. Polshchikova & Karen A. Nersisyan, 2025. "Macroeconomic Modeling in Post-pandemic Times," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 1, pages 62-73, February.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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