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Ramsey Policies in a Small Open Economy with Sticky Prices and Capital

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  • Stéphane Auray

    (EQUIPPE - Economie Quantitative, Intégration, Politiques Publiques et Econométrie - Université de Lille, Sciences et Technologies - Université de Lille, Sciences Humaines et Sociales - PRES Université Lille Nord de France - Université de Lille, Droit et Santé)

  • Beatriz de Blaz

    (Departamento de Teoría Económica e Historia Económica - UAM - Universidad Autónoma de Madrid)

  • Aurélien Eyquem

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper analyzes jointly optimal fiscal and monetary policies in a small open economy with capital and sticky prices. We allow for trade in consumption goods under perfect international risk sharing. We consider balanced-budget fiscal policies where authorities use distortionary taxes on labor and capital together with monetary policy using the nominal interest rate. First, as long as a symmetric equilibrium is considered, the steady state in an open economy is isomorphic to that of a closed economy. Second, whereas sticky prices allocations are almost indistinguishable from flexible prices allocations, the open economydimension delivers results that are qualitatively similar to those of a closed economy but with significant quantitative changes. Fluctuations in terms of trade implied by complete international financial markets affect (i) consumption through changes in the consumption price index (CPI), (ii) hours through changes in the CPI-based real wage and (iii) capital accumulation through the relative price of capital goods. These wedges affect the volatility and persistence of optimal tax rates, and resulting allocations are quite different, as compared to a closed economy.
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Suggested Citation

  • Stéphane Auray & Beatriz de Blaz & Aurélien Eyquem, 2010. "Ramsey Policies in a Small Open Economy with Sticky Prices and Capital," Post-Print halshs-00588090, HAL.
    • Handle: RePEc:hal:journl:halshs-00588090
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    Cited by:

    1. Stéphane Auray & Aurélien Eyquem & Paul Gomme, 2016. "A Tale Of Tax Policies In Open Economies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(4), pages 1299-1333, November.
    2. Tang Jenn-Hong, 2020. "Ramsey income taxation in a small open economy with trade in capital goods," The B.E. Journal of Macroeconomics, De Gruyter, vol. 20(1), pages 1-48, January.
    3. Franz Hamann & Jesús Bejarano & Diego Rodríguez, 2015. "Monetary policy implications for an oil-exporting economy of lower long-run international oil prices," Borradores de Economia 12615, Banco de la Republica.
    4. Cubizol, Damien, 2020. "Rebalancing in China: A taxation approach," China Economic Review, Elsevier, vol. 60(C).
    5. Jesús Bejarano & Franz Hamann & Paulina Restrepo-Echavarria & Diego Rodríguez, 2016. "Monetary Policy in an Oil-Exporting Economy," Review, Federal Reserve Bank of St. Louis, vol. 98(3), pages 239-261.
    6. Damien Cubizol, 2017. "Rebalancing in China: a taxation approach," Working Papers 1732, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.

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    More about this item

    Keywords

    small open economy; sticky prices; optimal monetary and fiscal policies;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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