Staff Report 403

Optimal Fiscal and Monetary Policy: Equivalence Results

Isabel Correia
Juan Pablo Nicolini | Senior Research Economist
Pedro Teles | Banco de Portugal, Catolica Lisbon SBE, and CEPR

Published April 1, 2008

In this article, we analyze the implications of price-setting restrictions for the conduct of cyclical fiscal and monetary policy. We consider standard monetary economies that differ in the price-setting restrictions imposed on the firms. We show that, independently of the degree or type of price stickiness, it is possible to implement the same efficient set of allocations and that each allocation in that set is implemented with policies that are also independent of the price stickiness. In this sense, environments with different price-setting restrictions are equivalent.

Published In: Journal of Political Economy (Vol. 116, Issue 1, February 2008, pp. 141)

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