Unconventional Monetary and Fiscal Policy

Abstract

We build a tractable New Keynesian model to jointly study four types of monetary and fiscal policy. We find quantitative easing (QE) and tax-financed fiscal transfers or government spending have similar effects on the aggregate economy. Compared with these three policies, conventional conetary policy is more inflationary. QE and transfers have redistribution consequences, whereas others 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 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