Working Papers
Abstract. We study monetary and fiscal policy interactions in a tractable HANK model with bounded rationality and constant primary deficit. We highlight two important theoretical results. First, when public debt is used for precautionary saving reasons and agents have imperfect foresight inflation can be jointly determined by monetary and fiscal policy active at the same time, while it is indeterminate in the rational expectations equilibrium. Second, in this new equilibrium, monetary policy dominates fiscal policy but a new monetary policy tradeoff emerges: the more aggressively monetary policy reacts to inflation, the lower will be current inflation but the higher will be debt and the larger the long-run inflation deviations from the target. Monetary policy rules that stabilize consumption inequality can help to mitigate this tradeoff.
Abstract. Cyclical inequality and idiosyncratic risk imply additional channels that amplify the transmission of persistent balance-sheet policies, through their effects on private sector's expectations and consumption risk. Through these channels, unconventional monetary policy improves the central bank's ability to anchor expectations and rule out endogenous instability. Moreover, they allow the central bank to optimally complement interest-rate policy in particular in response to financial shocks that expose the economy to the effective-lower-bound on the policy rate, and can promote a swifter exit from the liquidity trap.
Work in Progress
"Monetary Policy and Banks' Liquidity Uncertainty"