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Optimal fiscal and monetary policy in economies with capital

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  • Wang, Gaowang
  • Zou, Heng-fu

Abstract

We reexamine the optimal fiscal and monetary policy in combined shopping-time monetary models with capital accumulation. Four models are constructed to examine how the production cost of money and the utility from physical capital affect the toolbox of the fiscal and monetary policy. It is shown that the optimality of the Friedman rule hinges on the producing cost of money and 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; and when the consumer cares about the utility from capital, the limiting capital income tax is not zero in general.

Suggested Citation

  • Wang, Gaowang & Zou, Heng-fu, 2020. "Optimal fiscal and monetary policy in economies with capital," MPRA Paper 102753, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:102753
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    More about this item

    Keywords

    Transactions technology; Inflation tax; Capital income tax; Friedman rule; Capital in utility.;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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