Optimal simple and implementable monetary and fiscal rules
Subtitle: expanded version
By: Stephanie Schmitt-Groh,̌ Martn̕ Uribe
Contributors: Uribe, Martín; National Bureau of Economic Research
Series: NBER working paper series -- working paper 12402; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 12402.
Publisher: National Bureau of Economic Research
Published: 2006
Place of publication: Cambridge, MA
Language: eng
Format: [electronic resource] :
Description: "This paper computes welfare-maximizing monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption.  We consider simple feedback rules whereby the nominal interest rate is set as a function of output and inflation, and taxes are set as a function of total government liabilities.  We implement a second-order accurate solution to the model.  Our main findings are: First, the size of the inflation coefficient in the interest-rate rule plays a minor role for welfare.  It matters only insofar as it affects the determinacy of equilibrium.  Second, optimal monetary policy features a muted response to output.  More importantly, interest rate rules that feature a positive response to output can lead to significant welfare losses.  Third, the welfare gains from interest-rate smoothing are negligible.  Fourth, optimal fiscal policy is passive.  Finally, the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the Ramsey optimal policy"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 8/16/2006.

Includes bibliographical references.

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