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Inflation Bias and Markup Shocks in a LAMP Model with Strategic Interaction of Monetary and Fiscal Policy

Author

Listed:
  • Alice Albonico

    () (Department of Economics, Management and Statistics, University of Milan-Bicocca)

  • Lorenza Rossi

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

Abstract

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.

Suggested Citation

  • Alice Albonico & Lorenza Rossi, 2017. "Inflation Bias and Markup Shocks in a LAMP Model with Strategic Interaction of Monetary and Fiscal Policy," DEM Working Papers Series 133, University of Pavia, Department of Economics and Management.
  • Handle: RePEc:pav:demwpp:demwp0133
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    inflation bias; markup shocks; liquidity constrained consumers; optimal monetary and fiscal policy;

    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

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