Optimal Fiscal and Monetary Policy in Economies With Capital

We reexamine the optimal fiscal and monetary policy in combined shopping-time monetary models with capital accumulation. Four models are constructed to investigate how the production cost of money and the utility derived from physical capital affect the toolkit of fiscal and monetary policy. It is shown that the optimality of the Friedman rule hinges on the production cost of money, while capital-in-utility overturns the Chamley-Judd zero capital income taxation theorem. When the production cost of money approaches zero, the Friedman rule is optimal; however, when consumers derive utility from capital, the limiting capital income tax is generally not zero.