An Exploration of Optimal Stabilization Policy
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.
We are grateful to Olivier Blanchard, Gauti Eggertsson, David Romer, Chris Sims, and Justin Wolfers for comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
N. Gregory Mankiw & Matthew weinzierl, 2011. "An Exploration of Optimal Stabilization Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 209-272. citation courtesy of