Interest Rate Cuts vs. Stimulus Payments: An Equivalence Result

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Abstract/Contents

Abstract: In a textbook New Keynesian model extended to allow for uninsurable household income risk, any path of inflation and output implementable via nominal interest rate policy is also implementable by adjusting uniform lumpsum transfer payments, and vice-versa. The two tools are thus perfect substitutes for a dual mandate policymaker. It follows that conventional fiscal policy using stimulus checks can fully substitute for monetary policy when interest rates are constrained by an effective lower bound. In a quantitative heterogeneous-agent (HANK) model, the mapping between the equivalent fiscal and monetary policies is well-characterized by a small number of measurable sufficient statistics. While macro-equivalent, however, the two tools operate very differently in the cross-section of households: compared to a given rate cut, stimulus checks that deliver the same aggregate stabilization imply strictly lower consumption inequality.

Type of resource	text
Date created	August 16, 2021

DOI	https://doi.org/10.25740/kx624hv7074
Location	https://purl.stanford.edu/kx624hv7074

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License: This work is licensed under a Creative Commons Attribution 4.0 International license (CC BY).

Preferred citation: Wolf, C. (2022). Interest Rate Cuts vs. Stimulus Payments: An Equivalence Result. Stanford Digital Repository. Available at https://purl.stanford.edu/kx624hv7074

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