The Welfare Cost of Structural Distortions and Stochastic Shocks

Abstract

This paper develops a monetary-fiscal game which stresses the importance of international spillovers and introduces a double (monetaryand fiscal) cred- ibilityproblem. Models that neglect the inability of fiscal policymakers to commit will tend to underestimate the welfare cost of structural distortions. Due to international spillovers, stochastic shocks maybe relativelycostlyin welfare terms, despite the contribution of policysurprises to finance such shocks.commitment, spillovers, welfare analysis.