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An Exploration of Optimal Stabilization PolicyN. Gregory MankiwHarvard University - Department of Economics; National Bureau of Economic Research (NBER) Matthew WeinzierlHarvard University - Department of Economics April 27, 2011 Harvard Institute of Economic Research Discussion Paper No. 2193 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.
Number of Pages in PDF File: 36 JEL Classification: E52, E62, E63 working papers seriesDate posted: May 5, 2011Suggested CitationContact Information
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