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Ramsey Fiscal And Monetary Policy Under Sticky Prices And Liquid Bonds

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  • Yifan Hu
  • Timothy Kam

Abstract

We construct a monetary model where government bonds also provide liquidity service. Liquid government bonds create an endogenous interest-rate spread; affect equilibrium allocations and inflation by altering the Ramsey planner’s sequence of implementability and sticky-price constraints. The trade-off confronting a planner in a sticky-price world, shown in recent literature, between using inflation surprise and labor-income tax is modified by the existence of the liquid bond. We find that the more sticky prices become, the more the planner stabilizes prices and also creates less distortionary and less volatile income taxes by taxing the liquidity service of bonds in order to replicate ex post real state-contingent debt.

Suggested Citation

  • Yifan Hu & Timothy Kam, 2006. "Ramsey Fiscal And Monetary Policy Under Sticky Prices And Liquid Bonds," ANU Working Papers in Economics and Econometrics 2006-472, Australian National University, College of Business and Economics, School of Economics.
  • Handle: RePEc:acb:cbeeco:2006-472
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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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