Optimal Monetary and Fiscal Policy with Limited Asset Market Participation

July 1, 2009

Preview Citation

Format: Chicago

Sven Jari Stehn. Optimal Monetary and Fiscal Policy with Limited Asset Market Participation, (USA: International Monetary Fund, 2009) accessed September 18, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper characterises the jointly optimal monetary and fiscal stabilisation policy in a new Keynesian model that allows for consumers who lacking access to asset markets consume their disposable income each period. With full asset market participation, the optimal policy relies entirely on the interest rate to stabilise cost-push shocks and government expenditure is not changed. When asset market participation is limited, there is a case for fiscal stabilisation policy. Active use of public spending raises aggregate welfare because it enables a more balanced distribution of the stabilisation burden across asset-holding and non-asset-holding consumers. The optimal response of government expenditure is sensitive to the financing scheme and whether the policymaker has access to a targeted transfer that can directly redistribute resources between consumers.

Subject: Consumption, Expenditure, Fiscal policy, Real wages, Securities markets

Keywords: Government spending, Monetary policy, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/137
Stock No:

WPIEA2009137
ISBN:

9781451872842
ISSN:

1018-5941

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