Optimal Monetary Policy and Fiscal Policy Interaction in a Non-Ricardian Economy
by Massimiliano Rigona, and Francesco Zanettib
This paper studies optimal discretionary monetary policy
and its interaction with fiscal policy in a New Keynesian
model with finitely lived consumers and government debt.
Optimal discretionary monetary policy involves debt stabilization
to reduce consumption dispersion across cohorts of
consumers. The welfare relevance of debt stabilization is proportional
to the debt-to-output ratio and inversely related
to the household’s probability of survival that affects the
household’s propensity to consume out of financial wealth.
Debt-stabilization bias implies that discretionary optimal policy
is suboptimal compared with the inflation-targeting rule
that fully stabilizes the output gap and the inflation rate
while leaving debt to freely fluctuate in response to demand
JEL Code: E52, E63.
Full article (PDF, 48 pages, 2057 kb)
Discussion by Johannes Wieland
a Bank of Italy
b University of Oxford