Coordinating Monetary and Fiscal Policy for a Procyclical Real Wage

Rohit Prasad

Abstract


This paper highlights the joint role of monetary and fiscal policies in enabling procyclical movement of real wages. In the context of a monetary general equilibrium model I show that an expansionary monetary policy on its own can result in making workers and entrepreneurs better off, while an expansionary fiscal policy 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 combination of a fiscal dole to the worker and interest-dampening monetary policy can make both entrepreneur and worker better off. This suggests that the policies of the Treasury and central bank need to be coordinated in order to bring about Pareto improvement in the economy.

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