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Policy Games with Liquidity Constrained Consumers

  • Albonico, Alice
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    We investigate the optimal responses of policy authorities through a model where the fiscal and the monetary policymakers are independent and play strategically. We allow for the presence of two types of consumers: ‘Ricardians’, who trade in the assets market and ‘liquidity constrained’ consumers, who spend all their disposable labor income for consumption. We find that not only the different game structures but mainly the presence of ‘liquidity constrained’ consumers is crucial in determining the optimal responses of policies. In particular, for high enough fractions of liquidity constrained consumers the way policies react to cope with a mark-up shock change significantly and the role of fiscal policy becomes more relevant.

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    File URL: http://mpra.ub.uni-muenchen.de/25666/1/MPRA_paper_25666.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25666.

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    Date of creation: Sep 2010
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    Handle: RePEc:pra:mprapa:25666
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    1. Bilbiie, Florin O., 2008. "Limited asset markets participation, monetary policy and (inverted) aggregate demand logic," Journal of Economic Theory, Elsevier, vol. 140(1), pages 162-196, May.
    2. S. Gnocchi, 2007. "Discretionary Fiscal Policy and Optimal Monetary Policy in a Currency Area," Working Papers 602, Dipartimento Scienze Economiche, Universita' di Bologna.
    3. Jordi Galí & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations; How Well Does the RBC Model Fit Postwar U.S. Data?," IMF Working Papers 04/234, International Monetary Fund.
    4. Galí, Jordi & López-Salido, J David & Vallés Liberal, Javier, 2005. "Understanding the Effects of Government Spending on Consumption," CEPR Discussion Papers 5212, C.E.P.R. Discussion Papers.
    5. Klaus Adam & Roberto M. Billi, 2007. "Monetary conservatism and fiscal policy," Research Working Paper RWP 07-01, Federal Reserve Bank of Kansas City.
    6. Galí, Jordi & Lopez-Salido, Jose David & Vallés Liberal, Javier, 2004. "Rule-of-Thumb Consumers and the Design of Interest Rate Rules," CEPR Discussion Papers 4347, C.E.P.R. Discussion Papers.
    7. Giovanni Di Bartolomeo & Lorenza Rossi, 2007. "Effectiveness of monetary policy and limited asset market participation: Neoclassical versus Keynesian effects," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(3), pages 213-218.
    8. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
    9. Andrea Colciago, 2007. "Distortionary Taxation, Rule of Thumb Consumers and the Effect of Fiscal Reforms," Working Papers 113, University of Milano-Bicocca, Department of Economics, revised 2007.
    10. Beetsma, Roel & Jensen, Henrik, 2002. "Monetary and fiscal policy interactions in a micro-founded model of a monetary union," Working Paper Series 0166, European Central Bank.
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