Essays on Welfare Improving Role of Monetary and Fiscal Policy

The dissertation comprises of three essays that analyze the impact of monetary and fiscal policies on various aspects of the economy. Both types of policies affect the welfare of agents by influencing factors that affect the utility of agents. This thesis focusses on three different aspects: the impact of monetary and fiscal policy under limited financial market participation, the impact of monetary and fiscal interactions on the path or real debt of the government, the effectiveness of monetary policy under alternative payment systems. If heterogeneity is considered among individuals in terms of financial market participation, then I find that expansionary monetary and fiscal policy can positively affect the financial market participants, and also increase the amount of labor (both high skilled and low skilled) employed in the economy. In a separate section in this thesis, I analyze the role of monetary and fiscal policy in the face of rising transfer payments to the aging population, and its impact on government debt. In this scenario, it is possible for monetary policy to actively control inflation in the face of rising transfers, before and after the tax limit. This finding is my main contribution to the existing literature. In another section, I analyze if the effectiveness of monetary policy changes when credit is introduced in an economy in which theft of cash exists. If agents have a choice between cash and credit, and theft exists in the economy, then expansionary monetary policy can have a positive effect on that economy by influencing the cash-credit choice and thereby, resulting in lower theft