Essays on monetary and fiscal policy

Abstract

The thesis is divided into three chapters.<br/><br/>1) I study how monetary policy should be optimally designed when households show financial wealth heterogeneity.<br/>Main results: thanks to its ability to affect interest payments volatility, monetary policy has real effects even in a flexible-price cashless-limit environment; second, in a setup with nominal rigidities, price stability is no longer optimal. The extent of deviation from price stability depends on the initial level of debt dispersion.<br/><br/>2) I assess the role of housing price movements in influencing the optimal design of monetary policy. <br/>Under the optimal simple rule, housing price movements should not be a separate target variable in addition to inflation. Furthermore, the welfare loss arising from targeting housing prices becomes quantitatively more significant the higher the degree of access to the credit market.<br/><br/>3) I analyze the effects of fiscal policy in a currency area. <br/>Results: a public spending shock in one region increases private agents demand for imports and appreciates the terms of trade; second, a countercyclical fiscal rule can restore the Taylor principle, the uniqueness of the equilibrium and reduce macro-volatility.