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An Exploration of Optimal Stabilization Policy

Author

Listed:
  • N. Gregory Mankiw

    (Harvard University)

  • Matthew Weinzierl

    (Harvard University)

Abstract

This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand. The theoretical framework is a two-period general equilibrium model in which prices are sticky in the short run and flexible in the long run. Policy is evaluated by how well it raises the welfare of the representative household. Although the model has Keynesian features, its policy prescriptions differ significantly from those of textbook Keynesian analysis. Moreover, the model suggests that the commonly used “bang for the buck†calculations are potentially misleading guides for the welfare effects of alternative fiscal policies.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • N. Gregory Mankiw & Matthew Weinzierl, 2011. "An Exploration of Optimal Stabilization Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 209-272.
    • Handle: RePEc:bin:bpeajo:v:42:y:2011:i:2011-01:p:209-272
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    monetary policy; fiscal policy; general equilibrium model; Keynes;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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