Albonico, Alice (2010): Policy Games with Liquidity Constrained Consumers.
Download (317kB) | Preview
We investigate the optimal responses of policy authorities through a model where the fiscal and the monetary policymakers are independent and play strategically. We allow for the presence of two types of consumers: ‘Ricardians’, who trade in the assets market and ‘liquidity constrained’ consumers, who spend all their disposable labor income for consumption. We find that not only the different game structures but mainly the presence of ‘liquidity constrained’ consumers is crucial in determining the optimal responses of policies. In particular, for high enough fractions of liquidity constrained consumers the way policies react to cope with a mark-up shock change significantly and the role of fiscal policy becomes more relevant.
|Item Type:||MPRA Paper|
|Original Title:||Policy Games with Liquidity Constrained Consumers|
|Keywords:||policy games; optimal monetary and fiscal policy; liquidity constrained consumers;|
|Subjects:||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
E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
|Depositing User:||Alice Albonico|
|Date Deposited:||08. Oct 2010 11:48|
|Last Modified:||15. Feb 2013 21:42|
Adam, K. and R.M. Billi (2008). Monetary Conservatism and Fiscal policy. Journal of Monetary Economics vol. 55, 1376–1388.
Beetsma, R. and H. Jensen (2007) Monetary and Fiscal Policy Interactions in a Micro-Founded Model of a Monetary Union. Journal of International Economics.
Bilbiie, F.O. (2008) Limited asset markets participation, monetary policy and (inverted) aggregate demand logic. Journal of Economic Theory.
Campbell, J.Y., N.G. Mankiw (1989). Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence. NBER Macroeconomics Annual 1989 , 185-216, MIT Press.
Colciago, A. (2007) Distortionary Taxation, Rule of Thumb Consumers and the Effect of Fiscal Reforms. University of Milan Bicocca Working Paper 113 .
Di Bartolomeo, G., L. Rossi (2007). Effectiveness of monetary policy and limited asset market participation: Neoclassical versus Keynesian effects. International Journal of Economic Theory.
Gal´ı, J., J.D. L´opez-Salido and J. Vall´es (2004). Rule of Thumb Consumers and the Design of Interest Rate Rules. Journal of Money, Credit and Banking vol. 36(4), 739-764.
Gal´ı, J., J.D. L´opez-Salido and J. Vall´es (2007). Understanding the Effects of Government Spending on Consumption. Journal of the European Economic Association vol. 5(1), pages 227-270, MIT Press.
Gal´ı, J.,P. Rabanal (2004). Technology Shocks and Aggregate Fluctuations: How Well Does the RBC Model Fit Postwar U.S. Data?. NBER Working Paper 10636 .
Gnocchi, S. (2008). Discretionary Fiscal Policy and Optimal Monetary Policy in a Currency Area. Working Paper No. 602, Economics Department of Bologna University.
Rotemberg, J.J. (1982). Sticky prices in the United States. Journal of Political Economy vol. 90, 1187–1211.
Schmitt-Groh´e, S.,M. Uribe (2006). Optimal simple and implementable monetary and fiscal rules. Forthcoming in the Journal of Monetary Economics.