Welfare Maximizing Monetary and Fiscal Policy Rules
This paper studies the welfare effects of monetary and fiscal policy rules, in a dynamic general equilibrium model with sticky prices. The model features capital accumulation and endogenous labor effort, and exogenous productivity shocks. Government purchases are valued positively by the private sector. These purchases are financed using a proportional income tax. The government issues nominal one-period bonds. Monetary policy is described by an interest rate rule; fiscal policy is described by rules according to which the income tax rate and government purchases are set as functions of GDP. Sims' (2000) quadratic approximation method is used to solve the model, and to compute household welfare. The paper determines the response coefficients of the policy rules that maximize household welfare. Optimized monetary policy has a strong anti-inflation stance; optimized fiscal policy implies that the income tax rate is countercyclical, and that government purchases are procyclical; this result does not hinge on the degree of price stickiness.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
When requesting a correction, please mention this item's handle: RePEc:sce:scecf4:102. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.