Optimal Monetary and Fiscal Policies in Disaggregated Economies

The jointly optimal monetary and fiscal policy mix in a multi-sector New Keynesian model with sectoral government spending and productivity shocks entails a separation of roles: Sectoral government spending optimally adjusts to sectoral output gaps and inflation rates---a policy supported by evidenc...

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Bibliographic Details
Published in:NBER Working Paper Series 2024-09
Main Authors: Cox, Lydia, Feng, Jiacheng, Müller, Gernot, Pastén, Ernesto, Schoenle, Raphael, Weber, Michael
Format: Article
Language:English
Online Access:Get full text
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Summary:The jointly optimal monetary and fiscal policy mix in a multi-sector New Keynesian model with sectoral government spending and productivity shocks entails a separation of roles: Sectoral government spending optimally adjusts to sectoral output gaps and inflation rates---a policy supported by evidence from sectoral federal procurement data. Monetary policy optimally focuses on aggregate stabilization, but deviates from a zero-inflation target; in a model calibration to the U.S., however, it effectively approximates a zero-inflation target. Because monetary policy is a blunt instrument and government spending trades off stabilization against the optimal-level public good provision, the first best is not achieved.
ISSN:0898-2937
DOI:10.3386/w32914