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Some Welfare Implications Of Optimal Stabilisation Policy In An Economy With Capital And Sticky Prices

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  • Tatiana Damjanovic
  • Charles Nolan

Abstract

In this paper we review and extend some of the key lessons that seem to be emerging from the Ramsey‐inspired theory of dynamic optimal monetary and fiscal policies. We construct measures of the key distortions in our economy; we label these ‘dynamic wedges’. Inflation, actual or anticipated, distorts these wedges in the present period, shrinks the tax base and increases the deadweight loss. We show that, if possible, labour as well as capital ought to be subsidised in steady state. We point to a number of extensions to the Ramsey literature that may help in the formulation of actual policy.

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  • Tatiana Damjanovic & Charles Nolan, 2006. "Some Welfare Implications Of Optimal Stabilisation Policy In An Economy With Capital And Sticky Prices," Scottish Journal of Political Economy, Scottish Economic Society, vol. 53(1), pages 47-71, February.
    • Handle: RePEc:bla:scotjp:v:53:y:2006:i:1:p:47-71
    DOI: 10.1111/j.1467-9485.2006.00370.x
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