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Optimal Monetary Growth with Accomodating Fiscal Policy in a Small Open Economy

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  • Stephen J. Turnovsky

Abstract

This paper emphasizes how the choice of the optimal monetary growth rate in a small open economy under perfect capital mobility depends upon the accommodating policy chosen to maintain the overall budget constraint in the economy. When this occurs through lump sum taxation, the optimal monetary growth rate is shown to be the "distorted" Friedman monetary rule. If the adjustment occurs through the income tax rate, the optimal monetary growth rate involves a Phelps-type tradeoff between the income tax rate and the inflation tax rate. The framework is suited for analyzing optimal macroeconomic policy in general and the latter part of the paper considers an optimal monetary-fiscal package.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2084.

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Date of creation: Oct 1987
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Publication status: published as Turnovsky, Stephen J. "Optimal Monetary Growth with Accomodating Fiscal Policy in a Small Open Economy," Journal of International Money and Finance, Vol. 6, No. 2, June 1987, pp. 179-193.
Handle: RePEc:nbr:nberwo:2084

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  1. Brock, William A, 1974. "Money and Growth: The Case of Long Run Perfect Foresight," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 15(3), pages 750-77, October.
  2. Turnovsky, Stephen J. & Brock, William A., 1980. "Time consistency and optimal government policies in perfect foresight equilibrium," Journal of Public Economics, Elsevier, vol. 13(2), pages 183-212, April.
  3. Mantel, Rolf & Martirena-Mantel, Ana M., 1982. "Exchange rate policies in a small economy : The active crawling peg," Journal of International Economics, Elsevier, vol. 13(3-4), pages 301-320, November.
  4. Maurice Obstfeld, 1980. "Macroeconomic Policy, Exchange-Rate Dynamics, and Optimal Asset Accumulation," NBER Working Papers 0599, National Bureau of Economic Research, Inc.
  5. Maurice Obstfeld, 1981. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," NBER Working Papers 0686, National Bureau of Economic Research, Inc.
  6. Brock, William A., 1975. "A simple perfect foresight monetary model," Journal of Monetary Economics, Elsevier, vol. 1(2), pages 133-150, April.
  7. James Tobin, 1968. "Notes on Optimal Monetary Growth," Cowles Foundation Discussion Papers 245, Cowles Foundation for Research in Economics, Yale University.
  8. Hodrick, Robert J., 1982. "On the effects of macroeconomic policy in a maximizing model of a small open economy," Journal of Macroeconomics, Elsevier, vol. 4(2), pages 195-213.
  9. Turnovsky, Stephen J., 1985. "Domestic and foreign disturbances in an optimizing model of exchange-rate determination," Journal of International Money and Finance, Elsevier, vol. 4(1), pages 151-171, March.
  10. Clarke, Harry R. & Kingston, Geoffrey H., 1979. "The optimal crawl : A comment," Journal of International Economics, Elsevier, vol. 9(1), pages 131-136, February.
  11. Mathieson, Donald J., 1976. "Is there an optimal crawl?," Journal of International Economics, Elsevier, vol. 6(2), pages 183-202, May.
  12. Mathieson, Donald J., 1979. "The optimal crawl : A reply," Journal of International Economics, Elsevier, vol. 9(1), pages 137-137, February.
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Cited by:
  1. Chang, Wen-ya & Tsai, Hsueh-fang & Lai, Ching-chong, 2002. "Anticipated foreign military threat, arms accumulation, and the current account in a small open economy," Journal of International Money and Finance, Elsevier, vol. 21(7), pages 1035-1052, December.

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