Jing Cynthia Wu (University of Notre Dame) - (Un)Conventional Monetary and Fiscal Policy

Co-author: Yinxi Xie (Bank of Canada)

We build a tractable two-agent New Keynesian (TANK) model to jointly study four types of policy: conventional monetary policy, quantitative easing (QE), government expenditures, and lump-sum transfers. We find QE, transfers, and government spending can 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 to achieve the same amount of stimulus. QE and transfers have distributional consequences, whereas government spending and conventional monetary policy do not. Finally, Ricardian equivalence breaks in our model, and tax-financed fiscal policy is more stimulative than debt-financed policy.

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