Interest Rate Cuts vs. Stimulus Payments: An Equivalence Result
In a textbook New Keynesian model extended to allow for uninsurable household income risk, any path of inflation and output implementable via interest rate policy is similarly implementable through uniform lump-sum transfers ("stimulus checks"). A dual-mandate policymaker can thus use checks to perfectly substitute for conventional monetary policy when rates are constrained by a lower bound. In a quantitative heterogeneous-agent (HANK) model, the stimulus check policy that implements a given monetary allocation is well-characterized by a small number of measurable sufficient statistics. In the household cross-section, the transfer policy is associated with lower consumption inequality than the equivalent rate cut.
I received helpful comments from Mark Aguiar, Manuel Amador, Marios Angeletos, Cristina Arellano, Gadi Barlevy, Martin Beraja, Anmol Bhandari, Markus Brunnermeier, Lukas Freund, Erik Hurst, Oleg Itskhoki, Greg Kaplan, Loukas Karabarbounis, Jennifer La'O, Alisdair McKay, Amanda Michaud, Benjamin Moll, Simon Mongey, Jonathan Parker, Mikkel Plagborg-Møller, Ricardo Reis, Harald Uhlig, Gianluca Violante, Tom Winberry, Iván Werning, and seminar participants at various venues. I also thank Isabel Di Tella for outstanding research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.