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Optimal Fiscal and Monetary Policies Under Limited Asset Market Participation

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  • Lorenzo Menna

    (Direccion de Analisis de Riesgos Macrofinancieros Banco de Mexico)

Abstract

I reconsider the issue of optimal monetary and fiscal policy in a fully fledged DSGE model augmented for a share of agents excluded from asset market participation (rule-of-thumb consumers) when many fiscal instruments are available. Limited asset market participation entails a stronger use of the consumption tax in place of the labor tax in steady state. Along the business cycle, monetary policy stabilizes inflation while fiscal policy can play an important role in attenuating the effect of productivity shocks on income distribution.

Suggested Citation

  • Lorenzo Menna, 2016. "Optimal Fiscal and Monetary Policies Under Limited Asset Market Participation," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 2(3), pages 363-383, November.
    • Handle: RePEc:spr:italej:v:2:y:2016:i:3:d:10.1007_s40797-016-0038-7
    DOI: 10.1007/s40797-016-0038-7
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    More about this item

    Keywords

    Trend inflation; Monetary and fiscal policy; Ramsey plan; Limited Asset Market Participation;
    All these keywords.

    JEL classification:

    • 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
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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