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Some Welfare Implications of Optimal Stabilization 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, it shrinks the tax base and increases the deadlweight loss. We show that, if possible, labour as well as capital ought to be subsidized 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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Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 200509.

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Date of creation: 15 Jul 2005
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Handle: RePEc:san:cdmawp:0509

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Keywords: Optimal taxation; aggregative monetary and fiscal policies.;

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  1. 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.
  2. Jagjit S. Chadha & Charles Nolan, 2004. "Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy," CDMA Working Paper Series 200406, Centre for Dynamic Macroeconomic Analysis.
  3. Barro, Robert J., 1979. "On the Determination of the Public Debt," Scholarly Articles 3451400, Harvard University Department of Economics.
  4. Jang-Ting Guo & Kevin J. Lansing, 1998. "Optimal taxation of capital income with imperfectly competitive product markets," Working Papers in Applied Economic Theory 98-04, Federal Reserve Bank of San Francisco.
  5. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
  6. Anamaria Nicolae & Charles Nolan, 2004. "The Impact of Imperfect Credibility in a Transition to Price Stability," CDMA Working Paper Series 200402, Centre for Dynamic Macroeconomic Analysis.
  7. Chadha, Jagjit S. & Nolan, Charles, 2004. "Interest rate bounds and fiscal policy," Economics Letters, Elsevier, vol. 84(1), pages 9-15, July.
  8. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Optimal Fiscal and Monetary Policy Under Sticky Prices," Departmental Working Papers 200105, Rutgers University, Department of Economics.
  9. Chadha, J.S. & Nolan, C., 2003. "On the Interaction of Monetary and Fiscal Policy," Cambridge Working Papers in Economics 0303, Faculty of Economics, University of Cambridge.
  10. Kenneth L. Judd, 2002. "Capital-Income Taxation with Imperfect Competition," American Economic Review, American Economic Association, vol. 92(2), pages 417-421, May.
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