Risk, Optimal Government Finance and Monetary Policies in a Growing Economy
Optimal tax and monetary policies in a stochastic monetary growth model are investigated. The authors' findings are of three general types. First, both capital income taxes and monetary growth are shown to influence the economy through effective risk-adjusted measures, expressed as a linear function of their respective means and variances. Second, two stochastic neutrality results relating to money and bonds, the two nominal assets in the economy, are identified. Third, optimal policy rules relating to taxes, bond finance, and money creation are characterized. An essential component of optimal financial policy is a risk-adjusted balanced budget. Copyright 1998 by The London School of Economics and Political Science
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Volume (Year): 65 (1998)
Issue (Month): 259 (August)
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