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Optimal Fiscal and Monetary Policy: Equivalence Results

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Author Info
Correia, Maria Isabel Horta
Nicolini, Juan Pablo
Teles, Pedro

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Abstract

In this Paper, we analyse the implications of price setting restrictions for the conduct of cyclical fiscal and monetary policy. We consider an environment with monopolistic competitive firms, a shopping time technology, prices set one period in advance, and government expenditures that must be financed with distortionary taxes. We show that the sets of (frontier) implementable allocations are the same independent of the degree of price stickiness. Furthermore, the sets of policies that decentralize each allocation are also the same except in the extreme cases of flexible and sticky prices, where the sets are larger.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3730.

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Date of creation: Feb 2003
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Handle: RePEc:cpr:ceprdp:3730

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Related research
Keywords: optimal fiscal and monetary policy sticky prices

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization

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  1. Correia, Maria Isabel Horta & Teles, Pedro, 1996. "Is the Friedman Rule Optimal When Money is an Intermediate Good?," CEPR Discussion Papers 1287, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  3. Fiorella De Fiore & Pedro Teles, 2002. "The optimal mix of taxes on money, consumption and income," Working Paper Series WP-02-03, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  4. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2000. "Optimal monetary policy," Working Paper 00-10, Federal Reserve Bank of Richmond. [Downloadable!]
    Other versions:
  5. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1991. "Optimal fiscal and monetary policy: some recent results," Staff Report 147, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  6. Martin Uribe & Stephanie Schmitt-Grohe, 2001. "Optimal fiscal and monetary policy under sticky prices," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
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  7. Charles T. Carlstrom & Timothy S. Fuerst, 1998. "Price-level and interest-rate targeting in a model with sticky prices," Working Paper 9819, Federal Reserve Bank of Cleveland. [Downloadable!]
  8. Ireland, Peter N, 1996. "The Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 704-23, August. [Downloadable!] (restricted)
  9. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Bernardino Adao & Isabel Correia & Pedro Teles, 2000. "The Monetary Transmission Mechanism: Is it Relevant for Policy?," Econometric Society World Congress 2000 Contributed Papers 0967, Econometric Society. [Downloadable!]
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  11. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June. [Downloadable!] (restricted)
  12. Adao, Bernardino & Correia, Maria Isabel Horta & Teles, Pedro, 2001. "Gaps and Triangles," CEPR Discussion Papers 2668, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
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  14. Marvin Goodfriend & Robert G. King, 1998. "The new neoclassical synthesis and the role of monetary policy," Working Paper 98-05, Federal Reserve Bank of Richmond. [Downloadable!]
  15. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips Curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
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  16. Zhu, Xiaodong, 1992. "Optimal fiscal policy in a stochastic growth model," Journal of Economic Theory, Elsevier, vol. 58(2), pages 250-289, December. [Downloadable!] (restricted)
  17. Woodford, Michael, 2000. "Optimal Monetary Policy Inertia," Seminar Papers 666, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  18. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under imperfect competition," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 183-209, June. [Downloadable!] (restricted)
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  19. Bernheim, B Douglas, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 540-42, August. [Downloadable!] (restricted)
  20. Charles T. Carlstrom & Timothy S. Fuerst, 1998. "A Note on the Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 860-889, August. [Downloadable!] (restricted)
  21. Kimbrough, Kent P., 1986. "The optimum quantity of money rule in the theory of public finance," Journal of Monetary Economics, Elsevier, vol. 18(3), pages 277-284, November. [Downloadable!] (restricted)
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