Policy Games with Liquidity Constrained Consumers

Alice Albonico

MPRA Paper from University Library of Munich, Germany

Abstract: We investigate the optimal responses of policy authorities through a model where the fiscal and the monetary policymakers are independent and play strategically. We allow for the presence of two types of consumers: ‘Ricardians’, who trade in the assets market and ‘liquidity constrained’ consumers, who spend all their disposable labor income for consumption. We find that not only the different game structures but mainly the presence of ‘liquidity constrained’ consumers is crucial in determining the optimal responses of policies. In particular, for high enough fractions of liquidity constrained consumers the way policies react to cope with a mark-up shock change significantly and the role of fiscal policy becomes more relevant.

Keywords: policy games; optimal monetary and fiscal policy; liquidity constrained consumers (search for similar items in EconPapers)
JEL-codes: E61 E63 (search for similar items in EconPapers)
Date: 2010-09
New Economics Papers: this item is included in nep-mac and nep-mon
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