Optimal fiscal and monetary policy in an economy without capital robert e. The performance of monetary and fiscal rules in an open. Optimal fiscal and monetary policy under sticky prices by. In fact, precisely this policy mix has been advocated by feldstein l980a and others and appears to have been put in place by the reagan administration. Optimal fiscal and monetary policy for a small open economy. This pdf is a selection from a published volume from the. Optimal fiscal and monetary policy with costly wage. One of the outstanding monetary theorists of the past 100 years, lucas revolutionized our. Some recent results a fundamental question in macroeconomics is, how should fiscal and monetary policy be set over the business cycle. Optimal fiscal and monetary policy and economic growth. Jul 16, 2001 this paper studies optimal fiscal and monetary policy under sticky product prices. All revenue has to be raised through distortionary taxation of labor income. Section 6 studies the ramsey problem in an economy in which capital and labor can be taxed at different rates. In their model, the government finances exogenous expenditures with.
Monetary policy is primarily concerned with the management of. The government finances an exogenous stream of purchases by levying distortionary income taxes, printing money, and issuing oneperiod nominally riskfree bonds. Commitment refers to ability of a policymaker to make binding policy choices. The government should balance the shockabsorbing bene ts of statecontingent in ation against the costs of tightening collateral constraints. In a monetary economy, the idea of optimal taxation must be broadened to include an inflation tax, and we find that timeconsistency does not carry over. An optimizationbased econo metric framework for the evaluation of monetary policy.
Optimal fiscal and monetary policy with commitment springerlink. Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Stokey, journal of monetary economics, elsevier, vol. Optimal fiscal and monetary policy and economic growth author. Fiscal policy and economic growth in south africa matthew kofi ocran 1 1 department of economics, university of fort h are, alice main c ampus, private mail bag, x 14. Optimal fiscal policy with recursive preferences anastasios g. Karantounias working paper 207b september 20 revised march 2017 abstract. Optimal fiscal and monetary policy economics and finance. Ramsey approach to optimal taxation is the solution to the problem of choosing optimal taxes and transfers given that only distortionary tax instruments are available.
Throughout this chapter, we focus on economies in which the government effectively. Optimal monetary and fiscal policy in an economy without capital jme 1983 1. Monetary policy and economic policy scientific papers. Optimal fiscal policy in a small open economy and the. We consider a model of a market economy with two produced com moditiesconsumption goods and investment goodsand three assets money, bonds, and capital. University, center for mathematical studies in economics and management science.
The study shows that monetary policy which is proxied with the amount of money supply has positive and significant impact on economic growth, while fiscal policy has insignificant impact on. Pdf on feb 1, 1969, karl shell and others published optimal fiscal and. The model shows that previous findings drawn from open economy modelsin particular with respect to the characteristics of optimal monetary policydo not hold once the implications of certain fiscal regimes are taken into account, and once different scenarios. Fisher jedc 1980 and barro and gordon jme 1983 gave such cases in fiscal policy and monetary policy, respectively. Optimal fiscal and monetary policy in an economy without capital robert lucas and nancy stokey journal of monetary economics, 1983, vol.
Economic fluctuations and growth program we provide an introduction to optimal fiscal and monetary policy using the primal approach to optimal taxation. In this context, this paper will be devoted to the study of the interaction between monetary policy and fiscal policy in tunisia, in order to clear the optimal policy mix for the tunisian economy. We then develop a general framework to analyze optimal fiscal policy. Optimal fiscal and monetary policy with collateral constraints. As in our setting, lumpsum taxes that fund the contraction are imposed symmetrically on. Even if an indexed debt structure is needed to create capital market access in. This paper is concerned with the structure and timeconsistency of optimal fiscal and monetary policy in an economy without capital. We show that, for any given member country, the relinquishment of monetary policy independence, coupled with nominal price. Fernanda nechio federal reserve bank of san francisco.
Optimal fiscal and monetary policy with commitment is a policy of choosing taxes and transfers or monetary instruments to maximize social welfare. An exact consumption loan model of interest with and without the social contrivance of money. This paper studies the role of assetmarket completeness for the properties of optimal fiscal and monetary policy. As argued in kydland and prescott jpe 1977, optimal government policy is likely to be time inconsistent. Sleet 1997 develops similar tools than phelan and stacchetti 2001 and explores the set of equilibria in an overlapping generation economy. Optimal fiscal policy under commitment yale university. Jordi gal tommaso monacelli december 2004 abstract we lay out an optimizing multicountry framework suitable for.
They consider a stochastic production economy without capital, with cash and credit goods. Optimal fiscal policy in a business cycle model without. Chang 1998 uses recursive game theory to study optimal monetary policy in a very similar spirit to our approach. In a dynamic context, optimal taxation means distributing tax distortions over time in a welfaremaximizing way. Standard ramsey taxsmoothing prescriptions are dramatically altered. Optimal fiscal and monetary policy with collateral constraints qingqing cao abstract we study the ramsey optimal scal and monetary policy in an economy with nancially constrained banks. For a barter economy, our main finding is that with debt commitments of sufficiently rich maturity structure, an optimal policy, if one exists, is timeconsistent. Optimal monetary and fiscal policy with limited asset market. The views in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the federal reserve banks of san francisco and. A suitable framework for this purpose is the small open economy with complete. In three recent papers chari, christiano, and kehoe 1990a,b,c, we have analyzed various aspects of this question.
Optimal fiscal and monetary policy in an economy without capital. Optimal fiscal and monetary policy in an economy without. Forafulldiscussionofthesepropositions,seerybczinski 8oruzawa. Gapen is an economist in the international capital markets department. Life cycle, individual thrift, and the wealth of nations. Chugh, sanjay k 2006b optimal inflation persistence. Pdf fiscal policy and economic growth in south africa. Section 5 identifies simple interestrate and tax rules capable of mimicking well the ramsey equilibrium dynamics.
Optimal fiscal policy under commitment ramsey approach to the optimal taxation. Comments optimal fiscal and monetary policy in an economy without capital by robert e. This paper studies an overlapping generations economy with capital where limited. Issues in the coordination of monetary and fiscal policy 7 strong tax incentives for industrial capital formation. Optimal fiscal and monetary policy, and economic growth. For a barter economy, our main finding is that with debt commitments.
It shows analytically that in this economy the nominal interest rate acts as an indirect tax on monopoly profits. Optimal fiscal and monetary policy in an economy without capital, journal of monetary economics, elsevier, vol. Monetary policy and fiscal policy refer to the two most widely recognized tools used to influence a nations economic activity. Cosimano is a professor of finance at the department of finance, university of notre dame, and michael t. Monetary policy uses a variety of tools to control one or both of these, to influence. Ramsey policy, optimal monetary policy, optimal taxation authors email address. Optimal fiscal and monetary policy in a mediumscale. Optimal fiscal and monetary policy under imperfect. Finally, we analyze optimal monetary policy in three commonly used models of money. European institute, eui working papers in economics 9837. In ation reduces bank net worth and tightens their collateral constraint by revaluing their nominal assets and liabilities. The theoretical framework is a stochastic production economy without capital. The ramsey problem was solved in economies with and without debt and under.
Optimal fiscal and monetary policy with commitment. A second example is the foreign exchange rate which is strongly in. There is no capital in the economy, and, in most of the paper, no money either. All revenue has to be raised through distortionary taxation of labor income, or equivalently of commodities. Optimal fiscal and monetary policy 387 sources of income at the same rate.
Optimal fiscal and monetary policy with nominal and indexed debt. We provide an introduction to optimal fiscal and monetary policy using the. Ramsey taxation with capital and habits journal of monetary economics. In a monetary economy, the idea of optimal taxation must be. Optimal monetary and fiscal policy with limited asset market participation prepared by sven jari stehn1 authorized for distribution by ashoka mody eur july 2009 abstract this working paper should not be reported as representing the views of the imf. Article pdf available in journal of political economy 774. Optimal fiscal and monetary policy in an economy without capital, discussion papers 532, northwestern university, center for mathematical studies in economics and management science. Schmittgrohe, stephanie and uribe, martin 2004 a optimal fiscal and monetary policy under imperfect competition. Optimal fiscal and monetary policy without commitment mikhail golosov and aleh tsyvinski1 may 31, 2006 forthcoming in new palgrave dictionary of economics and law optimal fiscal and monetary policy is a policy of choosing taxes and transfers or monetary instruments to maximize social welfare. This paper studies optimal fiscal and monetary policy under imperfect competition in a stochastic, flexibleprice, production economy without capital. Fiscal and monetary policy 699 functional for the government is the best way to make rigorous the pre scription of government control in the mixed economy. I study the implications of recursive utility for the design of optimal. Optimal fiscal and monetary policy in an economy without capital, discussion papers 532, northwestern university, center for mathematical studies in economics and.