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Optimal monetary and fiscal policy with social status seeking and liquidity constraints
Author(s) -
Chang JuinJen,
Lin HsiehYu,
Shieh JhyYuan
Publication year - 2021
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/ijet.12220
Subject(s) - economics , consumption (sociology) , monetary economics , externality , liquidity constraint , friedman rule , fiscal policy , monetary policy , constraint (computer aided design) , investment (military) , microeconomics , market liquidity , budget constraint , autonomous consumption , debt , macroeconomics , mechanical engineering , social science , sociology , politics , law , political science , engineering
We study the optimal monetary (nominal interest rate) and fiscal (income tax) policy with both consumption‐ and wealth‐induced status seeking under a generalized liquidity constraint on consumption and investment. Our results suggest that monetary policy, in general, has an advantage in correcting status‐seeking‐induced distortions. A simple policy mix is incapable of leading the optimal allocation to be decentralized in the presence of wealth‐based (consumption‐based) status seeking under the cash constraint on consumption (investment) only. As for sub‐optimal policies, the monetary policy follows Friedman's rule while the optimal income tax corrects the consumption‐induced externality, leaving the wealth‐induced externality uncorrected.