All Rights Reserved
AccessEcon LLC 2006, 2008.
Powered by MinhViet JSC

Christopher David Cotton
''Excess stimulus and monetary policy''
( 2023, Vol. 43 No.3 )
Stimulus checks are seen increasingly as a crucial method of stimulating the economy in downturns. In early 2021, US households received stimulus amounting to 7.5 percent of their median annual income. I show, however, that it is difficult for a central bank to avoid overshooting its inflation target when credit-constrained households receive moderate excess stimulus. I find that if credit-constrained households receive excess stimulus equal to 1 percent of their median annual income, nominal interest rates must rise by 1 to 3 percentage points to prevent above-target inflation. This poses challenges to central bank credibility. I also find price-level targeting responds better than a Taylor rule to excess stimulus.
Keywords: stimulus checks, monetary policy, excess stimulus
JEL: E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General
Description of Appendix:

Online appendix
Description of Supplemental Material:

DSGE code
Manuscript Received : Feb 23 2023 Manuscript Accepted : Sep 30 2023

  This abstract has been downloaded 95 times                The Full PDF of this paper has been downloaded 156028 times