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| Christopher David Cotton |
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| ''Excess stimulus and monetary policy'' |
| ( 2023, Vol. 43 No.3 ) |
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| 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. |
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| 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 |
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| Manuscript Received : Feb 23 2023 | | Manuscript Accepted : Sep 30 2023 |
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