Optimized fiscal policy stabilizes income for borrowing-constrained agents, study finds.
The article explores how simple rules for monetary and fiscal policies can benefit an economy with borrowing constraints. The optimized fiscal rule focuses on stabilizing the income of borrowing-constrained individuals, while the monetary rule aims to minimize real wage volatility. The study shows that optimizing the fiscal rule leads to larger welfare gains compared to optimizing the monetary rule. The preferred fiscal tools are government spending and targeted transfers to help borrowing-constrained individuals.