Berriel, Tiago and Sinigaglia, Daniel (2008): Optimal Fiscal and Monetary Policy under Sectorial Heterogeneity.
Download (382kB) | Preview
This paper characterizes optimal fiscal and monetary policy in a new keynesian model with sectorial heterogeneity in price stickiness. In particular, we (i) derive a purely quadratic welfare-based loss function from an approximation of the representative agent's utility function and (ii) provide the optimal target rule for fiscal and monetary policy. Differently from the homogeneous case, the loss function includes sectorial inflation variances instead of aggregate inflation, with weights proportional to the degree of price stickiness; and sectorial output gaps instead of aggregate output gap with equal weight in each sector. Optimal policy implies a very strong positive correlation among sectorial output gaps and some dispersion of sectorial inflation in response to shocks. Larger heterogeneity in price stickiness implies larger impact of shocks on aggregate inflation. Optimal taxes are more responsive in sectors with stickier prices.
|Item Type:||MPRA Paper|
|Original Title:||Optimal Fiscal and Monetary Policy under Sectorial Heterogeneity|
|Subjects:||E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
|Depositing User:||Daniel Sinigaglia|
|Date Deposited:||30. Aug 2008 08:06|
|Last Modified:||14. Feb 2013 09:40|
Aoki, Kosuke. (2001). "Optimal monetary policy responses to relative price changes." Journal of Monetary Economics, 48, 55--80.
Barro, Robert. (1979). "On the Determination of Public Debt." Journal of Political Economy, 87, 940-971.
Benigno, Pierpaolo. (2004). "Optimal monetary policy in a currency area." Journal of International Economics, 63, 293-320.
Benigno, Pierpaolo and Michael Woodford . (2003). "Optimal Monetary and Fiscal Policy: A Linear-Quadratic Approach." NBER Working Papers 9905, July 2003.
Bils, Mark and Pete Klenow. (2004). "Some Evidence on the Importance of Sticky Prices." Journal of Political Economy, 112, 947-985.
Bohn, Henning. (1990). "Tax Smoothing with Financial Instruments." American Economic Review, 80, 1217-30.
Calvo, Guillermo. (1983). "Staggered prices in a utility-maximizing framework." Journal of Monetary Economics, 12, 382-398.
Carvalho, Carlos. (2006.) "Heterogeneity in Price Stickiness and the Real Effects of Monetary Shocks." Frontiers of Macroeconomics, 2(1), Article 1.
Dhyne, Emmanuel, Luis Alvarez, Herve Le Bihan, Giovanni Veronese, Daniel Dias, Johannes Hoffmann, Nicole Jonker, Patrick Lunnemann, Fabio Rumler, and Jouko Vilmunen. (2006). "Price Setting in the Euro Area and the United States: Some Facts From Individual Consumer Price Data." Journal of Economic Perspective, 20, 171-192.
Dixit, Avinash K., and Joseph E. Stiglitz. (1977). "Monopolistic Competition and Optimum Product Diversity." American Economic Review, 67, 297-308.
Ferrero, Andrea. (2005). "Fiscal and Monetary Rules for a Currency Union." European Central Bank Working Paper Series no. 502, July 2005.
Giannoni, Marc, and Michael Woodford. (2003). "Optimal Interest-Rate Rules I: General Theory." NBER Working Paper no. 9419, January 2003.
Justiniano, Alejandro, Giorgio Primiceri, and Andrea Tambalotti. (2008). "Investment Shocks and Business Cycles". Working Paper, February 2008.
Lucas, Robert E., and Nancy Stokey. (1983). "Optimal Fiscal and Monetary Policy in an Economy without Capital." Journal of Monetary Economics 12, 55-93.
Nakamura, Emi, and Jón Steinsson. (2007). "Monetary Non- Neutrality in a Multi-Sector Menu Cost Model." Working Paper, Harvard University, May 2007.
Rotemberg, Julio J., and Michael Woodford. (1999). "The cyclical behavior of prices and costs". In Handbook of Macroeconomics, edition 1, vol. 1, edited by John B. Taylor and Michael Woodford, pp. 1051-1135. Elsevier.
Smets, Frank, and Rafael Wouters. (2005). "Comparing Shocks and Frictions in US and Euro Area Business Cycles: A Bayesian DSGE Approach." Journal of Applied Econometrics, 20, 161-185.
Smets, Frank, and Rafael Wouters. (2007). "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach." American Economic Review, 97, 586-606.
Schmitt-Grohé, Stephanie, and Martin Uribe. (2004). "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function." Journal of Economic Dynamics and Control, 28, 755-775.
Steinsson, Jón. (2003). "Optimal monetary policy in an economy with inflation persistence." Journal of Monetary Economics, 50, 1425 - 1456.
Woodford, Michael. (1998). "Doing without Money: Controlling Inflation in a Post-Monetary World." Review of Economic Dynamics, 1, 173-219.
Woodford, Michael. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, NJ: Princeton University Press.