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 with commitment springerlink. Pdf on feb 1, 1969, karl shell and others published optimal fiscal and. Standard ramsey taxsmoothing prescriptions are dramatically altered. An exact consumption loan model of interest with and without the social contrivance of money. Chugh, sanjay k 2006b optimal inflation persistence. 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. Chang 1998 uses recursive game theory to study optimal monetary policy in a very similar spirit to our approach. This paper is concerned with the structure and timeconsistency of optimal fiscal and monetary policy in an economy without capital.
The ramsey problem was solved in economies with and without debt and under. Optimal fiscal and monetary policy for a small open economy. An optimizationbased econo metric framework for the evaluation of monetary policy. Even if an indexed debt structure is needed to create capital market access in. Pdf optimal fiscal and monetary policy and economic growth. Optimal fiscal and monetary policy in an economy without capital. Section 6 studies the ramsey problem in an economy in which capital and labor can be taxed at different rates. 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. 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 fiscal and monetary policy economics and finance. Monetary policy uses a variety of tools to control one or both of these, to influence.
We provide an introduction to optimal fiscal and monetary policy using the. 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 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. Optimal fiscal policy with recursive preferences anastasios g. Schmittgrohe, stephanie and uribe, martin 2004 a optimal fiscal and monetary policy under imperfect competition. Monetary policy is primarily concerned with the management of.
Optimal fiscal and monetary policy in an economy without capital, discussion papers 532, northwestern university, center for mathematical studies in economics and. Some recent results a fundamental question in macroeconomics is, how should fiscal and monetary policy be set over the business cycle. Article pdf available in journal of political economy 774. Optimal fiscal policy under commitment yale university. Ramsey taxation with capital and habits journal of monetary economics. Optimal fiscal and monetary policy in an economy without capital robert e. Optimal fiscal and monetary policy in an economy without. Stokey, journal of monetary economics, elsevier, vol. Pdf fiscal policy and economic growth in south africa. As argued in kydland and prescott jpe 1977, optimal government policy is likely to be time inconsistent. Finally, we analyze optimal monetary policy in three commonly used models of money.
A second example is the foreign exchange rate which is strongly in. Sleet 1997 develops similar tools than phelan and stacchetti 2001 and explores the set of equilibria in an overlapping generation economy. This paper studies optimal fiscal and monetary policy under imperfect competition in a stochastic, flexibleprice, production economy without capital. This pdf is a selection from a published volume from the. Monetary policy and fiscal policy refer to the two most widely recognized tools used to influence a nations economic activity. Throughout this chapter, we focus on economies in which the government effectively. Optimal fiscal policy in a business cycle model without. Optimal fiscal and monetary policy under sticky prices by.
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. As in our setting, lumpsum taxes that fund the contraction are imposed symmetrically on. European institute, eui working papers in economics 9837. For a barter economy, our main finding is that with debt commitments. This paper studies an overlapping generations economy with capital where limited. Economic fluctuations and growth program we provide an introduction to optimal fiscal and monetary policy using the primal approach to optimal taxation. It shows analytically that in this economy the nominal interest rate acts as an indirect tax on monopoly profits. Cosimano is a professor of finance at the department of finance, university of notre dame, and michael t. Optimal fiscal and monetary policy in a mediumscale. Fisher jedc 1980 and barro and gordon jme 1983 gave such cases in fiscal policy and monetary policy, respectively.
Optimal fiscal and monetary policy 387 sources of income at the same rate. Fernanda nechio federal reserve bank of san francisco. There is no capital in the economy, and, in most of the paper, no money either. Ramsey policy, optimal monetary policy, optimal taxation authors email address. In a monetary economy, the idea of optimal taxation must be. The performance of monetary and fiscal rules in an open. Comments optimal fiscal and monetary policy in an economy without capital by robert e. Optimal monetary and fiscal policy with limited asset market. Jordi gal tommaso monacelli december 2004 abstract we lay out an optimizing multicountry framework suitable for. Optimal fiscal policy in a small open economy and the. 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. Optimal monetary and fiscal policy in an economy without capital jme 1983 1. In three recent papers chari, christiano, and kehoe 1990a,b,c, we have analyzed various aspects of this question.
I study the implications of recursive utility for the design of optimal. Optimal fiscal and monetary policy in an economy without capital robert lucas and nancy stokey journal of monetary economics, 1983, vol. Forafulldiscussionofthesepropositions,seerybczinski 8oruzawa. University, center for mathematical studies in economics and management science. We then develop a general framework to analyze optimal fiscal policy. The government finances an exogenous stream of purchases by levying distortionary income taxes, printing money, and issuing oneperiod nominally riskfree bonds. Optimal fiscal policy under commitment ramsey approach to the optimal taxation. Issues in the coordination of monetary and fiscal policy 7 strong tax incentives for industrial capital formation. The theoretical framework is a stochastic production economy without capital. The government should balance the shockabsorbing bene ts of statecontingent in ation against the costs of tightening collateral constraints.
Life cycle, individual thrift, and the wealth of nations. 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. This paper studies the role of assetmarket completeness for the properties of optimal fiscal and monetary policy. 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. Optimal fiscal and monetary policy under imperfect. 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. Optimal fiscal and monetary policy with nominal and indexed debt. We show that, for any given member country, the relinquishment of monetary policy independence, coupled with nominal price. All revenue has to be raised through distortionary taxation of labor income.
We consider a model of a market economy with two produced com moditiesconsumption goods and investment goodsand three assets money, bonds, and capital. 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. Optimal fiscal and monetary policy and economic growth. A suitable framework for this purpose is the small open economy with complete. Commitment refers to ability of a policymaker to make binding policy choices. They consider a stochastic production economy without capital, with cash and credit goods. Optimal fiscal and monetary policy in an economy without capital, journal of monetary economics, elsevier, vol. One of the outstanding monetary theorists of the past 100 years, lucas revolutionized our. Optimal fiscal and monetary policy in an economy without capital, discussion papers 532, northwestern university, center for mathematical studies in economics and management science. Gapen is an economist in the international capital markets department. Optimal fiscal and monetary policy with costly wage. In their model, the government finances exogenous expenditures 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, and economic growth. Section 5 identifies simple interestrate and tax rules capable of mimicking well the ramsey equilibrium dynamics. Monetary policy and economic policy scientific papers. In a dynamic context, optimal taxation means distributing tax distortions over time in a welfaremaximizing way. Optimal fiscal and monetary policy with commitment is a policy of choosing taxes and transfers or monetary instruments to maximize social welfare. 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.
135 1462 1263 287 171 768 1169 1055 932 881 369 342 1020 1047 1163 972 489 1416 248 693 1119 1111 523 545 498 1390 1231 605 1208 1235 332 1033 1012 37 140