Author Abstract
This paper examines the optimal response of monetary and fiscal policy to a decline in aggregate demand. The theoretical framework is a two-period general equilibrium model in which prices are sticky in the short-run and flexible in the long-run. Policy is evaluated by how well it raises the welfare of the representative household. While the model has Keynesian features, its policy prescriptions differ significantly from textbook Keynesian analysis. Moreover, the model suggests that the commonly used "bang for the buck" calculations are potentially misleading guides for the welfare effects of alternative fiscal policies.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: May 2011
- HBS Working Paper Number: 11-113
- Faculty Unit(s): Business, Government and International Economy