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Optimal Fiscal and Monetary Policy: Equivalence Results

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  • Correia, Maria Isabel Horta
  • Nicolini, Juan Pablo
  • Teles, Pedro

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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Keywords: optimal fiscal and monetary policy; sticky prices;

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  1. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2002. "Optimal Monetary Policy," NBER Working Papers 9402, National Bureau of Economic Research, Inc.
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  3. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  4. Correia, Maria Isabel Horta & Nicolini, Juan Pablo & Teles, Pedro, 2003. "Optimal Fiscal and Monetary Policy: Equivalence Results," CEPR Discussion Papers 3730, C.E.P.R. Discussion Papers.
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  1. Más Política Monetaria No Convencional III: Política Fiscal
    by Jesús Fernández-Villaverde in Nada Es Gratis on 2010-09-14 21:46:59
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