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Title: Stabilization vs. Redistribution: the Optimal Monetary-Fiscal Mix

Author(s): Florin Ovidiu Bilbiie and Tommaso Monacelli

Publication Date: August 2020

Keyword(s): aggregate demand, inequality, Optimal Monetary-Fiscal Policy, redistribution and TANK

Programme Area(s): Monetary Economics and Fluctuations

Abstract: Stabilization and redistribution are intertwined in a model with heterogeneity, imperfect insurance, and nominal rigidity---making fiscal and monetary policy inextricably linked. Changes in government spending that are associated with changes in the distribution of taxes (progressive vs. regressive) induce a tradeoff for monetary policy: the central bank cannot stabilize real activity at its efficient level (including insurance) and simultaneously avoid inflation. Fiscal policy can be used in conjunction to monetary policy to strike the optimal balance between stabilization and insurance (redistribution) motives.

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Bibliographic Reference

Bilbiie, F and Monacelli, T. 2020. 'Stabilization vs. Redistribution: the Optimal Monetary-Fiscal Mix'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15199