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Policy Games, Distributional Conflicts and the Optimal Inflation (new version)


  • Alice Albonico

    () (Department of Economics and Management, University of Pavia)

  • Lorenza Rossi

    () (Department of Economics and Management, University of Pavia)


This paper shows that Limited Asset Market Participation generates an extra inflation bias when the fiscal and the monetary authority play strategically. A fully redistributive fiscal policy eliminates the extra inflation-bias, however, the latter is cancelled at the cost of reducing Ricardians' welfare. A fiscal authority which redistributes income only partially, reduces the inflation-bias, but rises Government spending. Despite a fully conservative monetary policy is necessary to get price stability, it implies a reduction in liquidity constrained consumers' welfare, in the absence of redistributive fiscal policies. Finally, under a crisis scenario price stability cannot be ensured by Ramsey without redistribution.

Suggested Citation

  • Alice Albonico & Lorenza Rossi, 2013. "Policy Games, Distributional Conflicts and the Optimal Inflation (new version)," DEM Working Papers Series 031, University of Pavia, Department of Economics and Management.
  • Handle: RePEc:pav:demwpp:031

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    Cited by:

    1. Alice Albonico & Alessia Paccagnini & Patrizio Tirelli, 2014. "Estimating a DSGE model with Limited Asset Market Participation for the Euro Area," Working Papers 286, University of Milano-Bicocca, Department of Economics, revised Nov 2014.

    More about this item


    liquidity constrained consumers; optimal monetary and fiscal policy; strategic interaction; inflation bias; redistribution.;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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