Optimal fiscal and monetary policy under imperfect competition. Therefore, the economy requires a change in the monetary fiscal policy mix. Pdf optimal fiscal and monetary policy in an economy without capital. Stokey, journal of monetary economics, elsevier, vol. For both economies, in ation is low, but very volatile, while. Is optimal monetary and fiscal policy in a small open. Furthermore, equilibrium without commitment can lead to lower welfare for society than when a government can bind its future choices. Stokey stanley fischer mit, cambridge, ma 0290 usa 1. Section 5 identifies simple interestrate and tax rules capable of mimicking well the ramsey equilibrium dynamics. The empirical tax rate on capital income ranges between 0.
Abstract this paper is concerned with the structure and timeconsistency of optimal fiscal and monetary policy in an economy without capital. Chari, christiano and kehoe 1994 extended this analysis to an economy with capital and showed the lucas and stokey results remain valid in that set up. When the fiscal authority is allowed to tax capital and labor income at different rates, optimal fiscal policy is characterized by a large and volatile subsidy on capital. E52, e61, e63 abstract this paper studies optimal fiscal and monetary policy under imperfect competition in a stochastic, flexibleprice, production economy without capital. The rst part is focused on monetary policy issues, and consists of two chapters. Financial frictions require fiscal policy to play a bigger role and lead to an increase in the costs associated with simple rules as opposed to the fully optimal policy. Unlike representativeagent ramsey models, workers are heterogenous and lumpsum taxation is not ruled out.
Optimal fiscal policy sets the marginal utility of g equal to the marginal utility of c. 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. In a monetary economy, the idea of optimal taxation must be. Schmittgrohe, stephanie and uribe, martin 2004 a optimal fiscal and monetary policy under imperfect competition.
Optimal fiscal and monetary policy with nominal and indexed debt. Second, optimal monetary policy features a muted response to output. In terms of the properties of fiscal policy, optimal tax policies should smooth distortions over. Is optimal monetary and fiscal policy in a small open economy. This paper studies monetary and fiscal policy rules, and investigates the characteristics of optimal policies. It is shown that the optimality of the friedman rule hinges on the producing cost of money and capital inutility overturns the chamleyjudd zero capital income taxation theorem. In a dynamic context, optimal taxation means distributing tax distortions over time in a welfaremaximizing way. Our model also ignores many aspects that are likely to be relevant for the design of optimal policies. Iriversity of chicago, chicago, il 60637, usa nancy l.
The first formalization of the notion of time inconsistency is due to kydland and prescott 1977, who showed how timing of government policy may change economic outcomes. Optimal fiscal and monetary policy when money is essential. Pdf monetary and fiscal policies for an open economy. Next, we consider a stochastic model without capital to highlight how optimal fiscal.
Optimal fiscal and monetary policy for a small open economy gianluca benigno bank of england, london school of economics and cepr. Optimal fiscal policy without commitment columbia business. The government should balance the shockabsorbing bene ts of statecontingent in ation against the costs of tightening collateral constraints. The performance of monetary and fiscal rules in an open. For this, the expansionary monetary policy should be combined with a restrictive fiscal policy. Two forces in the economy impose orthogonal restrictions on. Optimal fiscal and monetary policy in an economy without capital, discussion papers 532, northwestern. Optimal fiscal policy in a liquidity trap paul krugman. Optimal fiscal and monetary policy in an economy without capital. I study the optimal taxation oflabor and capital in a dynamic economy subject to government expenditure and technology shocks. We show that even this constraint on monetary policy does not by itself give traditional fiscal policy a role as a stabilization tool. Optimal fiscal and monetary policy with collateral constraints. Optimal policy in an economy with human capital where.
The first force requires constant financing costs across governments to have time consistent optimal policy of hours. Optimal monetary and fiscal policy with limited asset market. Consider the longrun state of the ramsey equilibrium in an economy without. Optimal fiscal and monetary policy under imperfect. Two forces in the economy impose orthogonal restrictions on financing costs across governments. Optimal fiscal and monetary policy under sectorial. 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 pdf logo. The development of a simple framework with optimizing agents and nominal rigidities is the point of departure for the analysis of three questions about fiscal and monetary policies in an open economy. Optimal monetary and fiscal policies in a search theoretic. Annals of economics and finance 192, 729748 2018 optimal fiscal and monetary policy with durable goods liutang gong, feng shi, and chan wang in this paper, we examine the question of how to conduct scal and monetary policy in a twosector ramsey model with durable and nondurable goods.
Section 6 studies the ramsey problem in an economy in which capital and labor can be taxed at. Results show that foreign shocks have a strong in uence in the dynamics of emerging economies, when compared to the designed optimal policy for a developed small open economy. Optimal fiscal and monetary policy in an economy without capital, discussion papers 532, northwestern university, center for mathematical studies in economics and. Longterm nominal loans and optimal fiscal and monetary policy qingqing cao department of economics michigan state university abstract this paper extends the stylized model incao2017b to account for the empirical fact that in ation a ects the net worth of banks mainly through the nominal loans banks extend to household and business sectors. Optimal fiscal policy in a small open economy and the. Optimal monetary growth with accomodating fiscal policy in a small open economy abstract this paper emphasizes how the choice of the optimal monetary growth rate in a small open economy under perfect capital mobility depends upon the accommodating policy chosen to maintain the overall budget constraint in the economy. In contrast, if fiscal feedback falls below some critical value, optimal monetary policy becomes strongly passive, and this passive monetary policy leads to a sharp deterioration in welfare. Comments optimal fiscal and monetary policy in an economy without capital by robert e. Pdf on feb 1, 1969, john f helliwell published monetary and fiscal policies for an open economy. This paper studies optimal fiscal and monetary policy under imperfect competition in a sto chastic, flexibleprice, production economy without capital. On the other hand, following the recent contributions by be. More importantly, interest rate rules that feature a positive response of the nominal interest rate to output can lead to significant welfare losses.
Ramsey steadystate policy and allocation as a function of with the zlb constraint solid line and without the zlb constraint dotted line. Fiscal policy continues to be set on classical principles. Therefore, various tools of fiscal policy as taxation, public borrowing, deficit financing and surpluses of public enterprises should be used in a combined manner so that they may not adversely affect the consumption, production and distribution of wealth. Optimal monetary policy and capital account restrictions. Lucas and stokey 1983 considered an optimal policy in a general equilibrium economy without capital, and showed that if government has access to state contingent bonds optimal taxes inherit the stochastic process of the shocks to government purchases. Optimal fiscal policy with redistribution the quarterly. Longterm nominal loans and optimal fiscal and monetary. Though monetary policy influences other variables, control of quantity of money is considered to be the key variable in the monetary policy. We study the ramsey optimal fiscal and monetary policy in an economy with finan. Stockey 1983, optimal fiscal and monetary policy in an economy without capital, journal of monetary economics, vol. For a barter economy, our main finding is that with debt commitments of sufficiently rich maturity structure, an optimal policy, if one exists, is time. This paper studies optimal monetary and fiscal policy in a small open economy. Optimal fiscal and monetary policy in an economy without capital by robert e. Jun 23, 2015 monacelli 20 characterizes optimal monetary policy in an open economy as the constrainedefficient ramsey allocation under preset prices, but does not consider capital account policies.
Siu, henry e, 2004, optimal fiscal and monetary policy with sticky prices, journal of monetary economics, 51, 576607. This dissertation is composed of three chapters and is structured in two parts. Accordingly, the government reduces its investment expenditure orand increases taxes so that the is curve shifts to the left to is 1. Public debt, inflation and the coordination of fiscal and. Monetary policy and fiscal policy refer to the two most widely recognized tools used to influence a nations economic activity. We provide an introduction to optimal fiscal and monetary policy using the. Chapter 1 deals with the eects of monetary policy in an economy with credit market imperfections where the central banks monetary policy instrument is the. Northholland optimal fiscal and monetary policy in an economy without capital robert e. Optimal fiscal and monetary policy 387 sources of income at the same rate. This pdf is a selection from a published volume from the. Find, read and cite all the research you need on researchgate.
The performance of monetary and fiscal rules in an open economy with imperfect capital mobility marcela meirelles aurelio january 2005 rwp 0501 abstract. Fiscal policy helps to accelerate the rate of economic growth by raising the rate of investment in public as well as private sectors. In a seminal paper, lucas and stokey 1983 consider a closed economy with no capital in which the government finances exogenous spending with taxes and. Jan 01, 1983 journal of monetary rconontics 12 1983 9599. Sachs 1984, international policy coordination in dynamic macroeconomic models, in v. Econstor is a publication server for scholarly economic literature, provided as a noncommercial public service by the zbw.
Optimal fiscal and monetary policy in a mediumscale. The paper examines the interrelationship between fiscal and monetary policy in a twocountry monetary union. Optimal monetary and fiscal policy with limited asset. In this paper we study optimal monetary and scal policies, and the welfare costs of in ation, within the lagos and wright 2005 framework. Jan 01, 1983 northholland optimal fiscal and monetary policy in an economy without capital robert e. This paper presents the optimal taxation problem in an onesector dynamic general equilibrium model where the government is confronted with fiscal constraint the ratio of government expenditure to gdp is exogenously given while households and firms do not recognize the fiscal constraint. Monetary and fiscal rules in an emerging small open. Optimal fiscal and monetary policy in an economy without.
View citations in econpapers 945 track citations by rss feed. Optimal fiscal and monetary policy in economies with. This pdf is a selection from a published volume from the national bureau. Fisher jedc 1980 and barro and gordon jme 1983 gave such cases in fiscal policy and monetary policy, respectively. We show that subsidies in decentralized markets can be implemented to alleviate underproduction, while money is. Optimal fiscal and monetary policy with commitment, forthcoming in the new palgrave. Effectiveness of monetary and fiscal policy explained with.
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. Optimal fiscal and monetary policy federal reserve bank of. Countryspecific dynamic optimal capital income tax rate. Monetary policy uses a variety of tools to control one or both of these, to influence. Four models are constructed to examine how the production cost of money and the utility from physical capital affect the toolbox of the fiscal and monetary policy.
Monetary and fiscal rules in an emerging small open economy. Fiscal and monetary policy in open economy oxford research. The seminal works of adam smith 1776 and john keynes 1936, supplemented by goldsmith 1969 and mckinnon 1973 provide the foundation for the theory, which argues that sound monetary and fiscal policy helps to develop strong capital markets. Monetary equilibria may be ine cient without scal policy tools due to bargaining frictions. Usa this paper is concerned with the structure and timeconsistency of optimal fiscal and monetary policy in an economy without capital. Optimal fiscal and monetary policy, debt crisis and management. Instead, the optimal policy is for the central bank to commit to future monetary policy actions in order to increase current aggregate demand. In these papers taxes are lump sum and optimal policy deviates from a price stability policy in order to allow policy makers to strategically manage the terms of trade. Optimal monetary and fiscal policy in an economy with non.
Absence of commitment refers to inability of a policymaker to make binding policy choices. Optimal fiscal and monetary policy in an economy without capital, journal of monetary economics, elsevier, vol. We reexamine the optimal fiscal and monetary policy in combined shoppingtime monetary models with capital accumulation. When the production cost of money approaches zero, the friedman rule is optimal. Anyway, monetary policy is defined as the central banks use of control of money supply or interest rates i. Optimal fiscal and monetary policy in economies with capital. Optimal monetary and fiscal policy in an economy without capital jme 1983 1.
As argued in kydland and prescott jpe 1977, optimal government policy is likely to be time inconsistent. The central focus of the paper is on the comparison of. Ramsey steadystate policy and allocation as a function of with the zlb constraint solid line and without the. Optimal monetary policy with endogenous entry and product. 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. When the economy is depressed and monetary policy cant set it right, the true opportunity cost of government spending is low.
In a closed economy framework it is optimal to perfectly. Chang, liu, and spiegel forthcoming look at capital controls and sterilization policy in a dsge model for the special closed capital account case of china. The first question concerns the optimal monetary policy targets in a world with trade and financial links. Figure 1 ramsey steadystate in the basic model notes. Optimal monetary policy and capital account restrictions in a.
Optimal fiscal and monetary policy in an economy without capital, discussion papers 532, northwestern university, center for mathematical studies in economics and management science. The ramsey problem was solved in economies with and without debt and under various. Time consistency of monetary and fiscal policy springerlink. Fiscal and monetary policy under imperfect commitment. Optimal fiscal and monetary policy without commitment. 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. Optimal monetary and fiscal policy for small open and. About help faqs contact us print citation alert off.
Optimal fiscal and monetary policy for a small open economy. Optimal fiscal and monetary policy with durable goods. The first is to establish the circumstances under which independent monetary policy is warranted even where a country is a small, satellite economy connected to a. Jun 01, 2004 this paper studies optimal fiscal and monetary policy under imperfect competition in a stochastic, flexibleprice, production economy without capital. This paper is concerned with the structure and timeconsistency of optimal fiscal and monetary policy in an economy without capital. Optimal fiscal and monetary policy under imperfect competition stephanie schmittgrohe and martin uribe nber working paper no. In ation reduces bank net worth and tightens their collateral constraint by revaluing their nominal assets and liabilities.
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