IDEAS home Printed from
   My bibliography  Save this paper

Optimal Fiscal and Monetary Policy In A Medium Scale Macro Model


  • Martin Uribe
  • Stephanie Schmitt-Grohe


In this paper we study optimal fiscal and monetary rules in a medium-scale estimated model of the U.S. business cycle. The model features several real and nominal rigidities that have been identfied in the recent literature as salient in explaining observed aggregate fluctuations. The government is assumed to conduct stabilization policy through the use of fiscal and monetary policy instruments. The fiscal instruments are capital and labor income tax rates, the monetary instrument is the nominal interest rate. The paper first characterizes Ramsey steady states. (Contrary to earlier papers that study optimal capital income taxation in models with imperfect competition, we find that the optimal capital income subsidy is not just equal to the markup but about 4 times larger. The reason for this discrepancy is that earlier papers abstracted from depreciation and the tax deductability of depreciation.) The paper characterizes the dynamic behavior of the economy under the Ramsey equilibrium. These dynamics are then used to find simple fiscal and monetary rules that imply dynamics similar to those induced by the Ramsey equilibrium. Specifically, the parameters of the monetary and fiscal rules are chosen so as to minimize the difference between the impulse responses of key macro aggregates under the Ramsey rule and under simple parametrized monetary and fiscal policy rules. In practise, an important difference between the monetary policy instrument and the fiscal policy instruments is that the nominal interest rate can be adjusted almost instantaneously if needed, whereas tax rates are much less flexible and typically are determined many periods in advance. We model this difference between fiscal and monetary policy instruments by assuming that it takes time to tax. We then ask whether the time-to-tax feature of fiscal policy reduces the power of fiscal instruments to stabilize the economy. The paper also makes some methodological contributions. It shows how to characterize Ramsey equilibria of medium-scale macro models by means of symbolic algebra tools.

Suggested Citation

  • Martin Uribe & Stephanie Schmitt-Grohe, 2005. "Optimal Fiscal and Monetary Policy In A Medium Scale Macro Model," Computing in Economics and Finance 2005 476, Society for Computational Economics.
  • Handle: RePEc:sce:scecf5:476

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below 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.

    More about this item

    JEL classification:

    • E - Macroeconomics and Monetary Economics


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf5:476. 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: . General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christopher F. Baum (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.