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Coordinating Monetary and Fiscal Policy for a Procyclical Real Wage

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Abstract:

This paper highlights the joint role of monetary andfiscal policies in enabling procyclical movement of real wages. Inthe context of a monetary general equilibrium model I show that anexpansionary monetary policy on its own can result in makingworkers and entrepreneurs better off, while an expansionary fiscalpolicy working in isolation will either make the worker worse off if it leads to an increase in output, or the entrepreneur worse off if it leads to a decline in output. A combinationof a fiscal dole to the worker and interest-dampening monetarypolicy can make both entrepreneur and worker better off. Thissuggests that the policies of the Treasury and central bank needto be coordinated in order to bring about Pareto improvement inthe economy.

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