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Some Welfare Implications of Optimal Stabilization Policy in an Economy with Capital and Sticky Prices

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  • Tatiana Damjanovic

    ()

  • Charles Nolan

    ()

Abstract

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 ‘dynamic wedges’. 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.

Suggested Citation

  • Tatiana Damjanovic & Charles Nolan, 2005. "Some Welfare Implications of Optimal Stabilization Policy in an Economy with Capital and Sticky Prices," CDMA Working Paper Series 200509, Centre for Dynamic Macroeconomic Analysis.
  • Handle: RePEc:san:cdmawp:0509
    as

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    File URL: http://www.st-andrews.ac.uk/~wwwecon/CDMA/papers/wp0509.pdf
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    References listed on IDEAS

    as
    1. Chadha, Jagjit S. & Nolan, Charles, 2004. "Interest rate bounds and fiscal policy," Economics Letters, Elsevier, vol. 84(1), pages 9-15, July.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under sticky prices," Journal of Economic Theory, Elsevier, vol. 114(2), pages 198-230, February.
    3. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
    4. Chadha, Jagjit S. & Nolan, Charles, 2007. "Optimal simple rules for the conduct of monetary and fiscal policy," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 665-689, December.
    5. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    6. Nicolae, Anamaria & Nolan, Charles, 2006. "The Impact of Imperfect Credibility in a Transition to Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 47-66, February.
    7. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    8. Guo, Jang-Ting & Lansing, Kevin J., 1999. "Optimal taxation of capital income with imperfectly competitive product markets," Journal of Economic Dynamics and Control, Elsevier, vol. 23(7), pages 967-995, June.
    9. Chadha, J.S. & Nolan, C., 2003. "On the Interaction of Monetary and Fiscal Policy," Cambridge Working Papers in Economics 0303, Faculty of Economics, University of Cambridge.
    10. Kenneth L. Judd, 2002. "Capital-Income Taxation with Imperfect Competition," American Economic Review, American Economic Association, vol. 92(2), pages 417-421, May.
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    More about this item

    Keywords

    Optimal taxation; aggregative monetary and fiscal policies.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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