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Optimal Fiscal and Monetary Policy with Durable Goods

Author

Listed:
  • Liutang Gong

    () (Guanghua School of Management and LMEQF, Peking University)

  • Feng Shi

    () (Guanghua School of Management and LMEQF, Peking University)

  • Chan Wang

    () (School of Finance, Central University of Finance and Economics)

Abstract

In this paper, we examine the question of how to conduct fiscal and monetary policy in a two-sector Ramsey model with durable and non-durable goods. Due to the fact that the intertemporal elasticity of substitution of durable goods is much higher than that of non-durable goods, the introduction of durable goods changes the policy prescriptions substantially. Specifically, in comparison with the findings in the literature, we find that the labor income tax rate and the interest rate exhibit greater volatility. In addition, the volatilities of the labor income tax rate and the interest rate increase with the decrease in the depreciation rate of durable goods.

Suggested Citation

  • Liutang Gong & Feng Shi & Chan Wang, 2018. "Optimal Fiscal and Monetary Policy with Durable Goods," Annals of Economics and Finance, Society for AEF, vol. 19(2), pages 729-748, November.
  • Handle: RePEc:cuf:journl:y:2018:v:19:i:2:gong:shi:wang
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    References listed on IDEAS

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    More about this item

    Keywords

    Durable goods; Fiscal and monetary policy; Volatility of the labor income tax rate; Interest rate volatility;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • 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

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