Supply Disruption, Fiscal Stimulus, Inflation and Monetary Policy
Paper Session
Saturday, Jan. 6, 2024 12:30 PM - 2:15 PM (CST)
- Chair: Jae Sim, Federal Reserve Board
(Un)Conventional Monetary and Fiscal Policy
Abstract
We build a tractable New Keynesian model to study four types of monetary and fiscal policy. We find that 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 down: 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.The Macroeconomic Effects of Excess Savings
Abstract
Social distancing and historic government transfers during the Covid pandemic led U.S. households to accumulate about \$2.3 trillion of ``excess savings'' by 2021Q3. We investigate how the distribution of excess savings affects the speed of its decumulation and its general equilibrium effects on aggregate spending, inflation, and wealth inequality. We perform this exercise in a Heterogenous Agent New Keynesian model, a DSGE model that can capture the joint distribution of excess savings, income, wealth, and marginal propensities to consume. This exercise sheds light on the limited success of the tightening campaign of the Federal Reserve over the last 12 months in slowing down aggregate demand and inflation pressures. Our analysis indicates nontrivial boost to aggregate consumption even in 2023 and 2024, which may explain the recent, unexpected strength of PCE growth.Income Inequality and Government Spending Multipliers
Abstract
The macroeconomic effects of government spending shocks vary over time and space. I use rich historical state-level data on military procurement and inequality to find the relationship between income inequality and the local government spending multipliers. I show that the effects of government spending shocks on output are larger in low-inequality states than in high-inequality states. In contrast, I find no evidence that employment multipliers differ by the extent of income inequality. These results are robust to various specifications and other sources of inequality data. Aggregate US data analysis suggests that aggregate multipliers are also high in a low-inequality economy. Income inequality within sectors and the distributional effects of government spending shock are discussed as the potential mechanisms behind the empirical findings.Discussant(s)
Alexandre Gaillard
,
Princeton University
Hikaru Saijo
,
University of California-Santa Cruz
Rodolfo Rigato
,
European Central Bank
Donggyu Lee
,
Federal Reserve Bank of New York
JEL Classifications
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
- E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook