(Un)Conventional Monetary and Fiscal Policy

64 Pages Posted: 25 Jul 2022 Last revised: 23 Nov 2022

See all articles by Jing Cynthia Wu

Jing Cynthia Wu

University of Notre Dame - Department of Economics; National Bureau of Economic Research (NBER)

Yinxi Xie

Bank of Canada

Multiple version iconThere are 2 versions of this paper

Date Written: July 14, 2022


We build a tractable New Keynesian model to jointly study four types of monetary and fiscal policy. We find quantitative easing (QE), lump-sum fiscal transfers, and government spending have the same effects on the aggregate economy when fiscal policy is fully tax financed. Compared with these three policies, conventional monetary policy is more inflationary for the same amount of stimulus. QE and transfers have redistribution consequences, whereas government spending and conventional monetary policy do not. Ricardian equivalence breaks: tax-financed fiscal policy is more stimulative than debt-financed policy. Finally, we study optimal policy coordination and find that adjusting two types of policy instruments, the policy rate together with QE or fiscal transfers, can stabilize three targets simultaneously: inflation, the aggregate output gap, and cross-sectional consumption dispersion.

Keywords: monetary policy, quantitative easing, fiscal policy, tax finance, debt finance

JEL Classification: E52, E62, E63

Suggested Citation

Wu, Jing Cynthia and Xie, Yinxi, (Un)Conventional Monetary and Fiscal Policy (July 14, 2022). Available at SSRN: https://ssrn.com/abstract=4163157 or http://dx.doi.org/10.2139/ssrn.4163157

Jing Cynthia Wu (Contact Author)

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yinxi Xie

Bank of Canada ( email )

234 Wellington Street West
Ottawa, Ontario K1A 0G9

HOME PAGE: http://www.yinxixie.com/

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