Optimal Monetary and Fiscal Policy with Limited Asset Market Participation

Author/Editor:

Sven Jari Stehn

Publication Date:

July 1, 2009

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper characterises the jointly optimal monetary and fiscal stabilisation policy in a new Keynesian model that allows for consumers who lacking access to asset markets consume their disposable income each period. With full asset market participation, the optimal policy relies entirely on the interest rate to stabilise cost-push shocks and government expenditure is not changed. When asset market participation is limited, there is a case for fiscal stabilisation policy. Active use of public spending raises aggregate welfare because it enables a more balanced distribution of the stabilisation burden across asset-holding and non-asset-holding consumers. The optimal response of government expenditure is sensitive to the financing scheme and whether the policymaker has access to a targeted transfer that can directly redistribute resources between consumers.

Series:

Working Paper No. 2009/137

Subject:

Consumption Expenditure Fiscal policy Real wages Securities markets

Frequency:

Monthly

English

Publication Date:

July 1, 2009

ISBN/ISSN:

9781451872842/1018-5941

Stock No:

WPIEA2009137

Pages:

34

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