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  • Brookings Papers on Economic Activity

An Exploration of Optimal Stabilization Policy

By: N. Gregory Mankiw and Matthew C. Weinzierl
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Abstract

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.

Keywords

Fiscal Policy; Monetary Policy; Economic Models; Aggregate Demand; Demand And Consumers; Money; Mathematical Methods; Taxation; Spending; Policy; Welfare; Household; Economic Slowdown And Stagnation

Citation

Mankiw, N. Gregory, and Matthew C. Weinzierl. "An Exploration of Optimal Stabilization Policy." Brookings Papers on Economic Activity (Spring 2011). (Also Harvard Business School Working Paper, No. 11-113, May 2011 and NBER Working Paper Series, No. 17029, May 2011.)
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About The Author

Matthew C. Weinzierl

Business, Government and the International Economy
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More from the Authors
  • Made In Space, Expectations Management, and the Business of In-Space Manufacturing By: Matthew C. Weinzierl and Mehak Sarang
  • Designing, Not Checking, for Policy Robustness: An Example with Optimal Taxation By: Benjami Lockwood, Afras Y. Sial and Matthew C. Weinzierl
  • Understanding Different Approaches to Benefit-Based Taxation By: Robert Scherf and Matthew C. Weinzierl
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