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Stabilization vs. Redistribution: The Optimal Monetary-Fiscal Mix

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  • Bilbiie, F. O.
  • Monacelli, T.
  • Perotti, R.

Abstract

Stabilization and redistribution are intertwined in a model with heterogeneity, imperfect insurance, and nominal rigidity-making fiscal and monetary policy inextricably linked for aggregate-demand management. Movements in inequality induced by fiscal transfers make the flexible-price equilibrium suboptimal, thus triggering a stabilization vs redistribution tradeoff. Likewise, changes in government spending that are associated with changes in the distribution of taxes (progressive vs. regressive) induce a tradeoff for monetary policy: the central bank cannot stabilize real activity at its efficient level (including insurance) and simultaneously avoid inflation. Fiscal policy can be used in conjunction to monetary policy to strike the optimal balance between stabilization and insurance (redistribution) motives.

Suggested Citation

  • Bilbiie, F. O. & Monacelli, T. & Perotti, R., 2024. "Stabilization vs. Redistribution: The Optimal Monetary-Fiscal Mix," Janeway Institute Working Papers 2421, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camjip:2421
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    Cited by:

    1. Xing Guo & Pablo Ottonello & Diego J. Perez, 2023. "Monetary Policy and Redistribution in Open Economies," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 1(1), pages 191-241.
    2. Stefano Maria Corbellini, 2022. "Optimal monetary and transfer policy in a liquidity trap," Diskussionsschriften dp2216, Universitaet Bern, Departement Volkswirtschaft.

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    More about this item

    Keywords

    Inequality; Redistribution; Aggregate Demand; Fiscal Transfers; Optimal Monetary-Fiscal Policy; TANK;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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