Some Welfare Implications Of Optimal Stabilisation Policy In An Economy With Capital And Sticky Prices
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 â€˜dynamic wedgesâ€™. 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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Volume (Year): 53 (2006)
Issue (Month): 1 (02)
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