Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/278292 
Year of Publication: 
2022
Series/Report no.: 
Discussion Papers No. 22-16
Publisher: 
University of Bern, Department of Economics, Bern
Abstract: 
Optimal monetary and fiscal policy are jointly analyzed in a heterogeneous two-agents New Keynesian environment, where fiscal policy is modeled in the form of lump-sum transfers set by the government. The main result is that transfer policy does not serve as a substitute for forward guidance - as it entails consumption dispersion costs - and does not affect its optimal duration. Transfers indeed influence the length of stay at the zero lower bound through two offsetting channels: a shortening channel works through an initial increase in transfers that mitigates the recession (reducing the need for forward guidance), and a lengthening channel works through a later transfer cut that curbs the undesired expansion (making forward guidance desirable for a longer horizon). Imposing a homogeneous transfer policy across agents does not change the stabilization outcome or the effect on the duration of forward guidance, nor does so allowing for cyclical income differences.
Subjects: 
heterogeneity
inequality
liquidity trap
optimal monetary policy
optimal fiscal policy
forward guidance
JEL: 
E52
E62
E63
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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