Optimal fiscal and monetary policy in a medium-scale macroeconomic model
Subtitle: expanded version
By: Stephanie Schmitt-Grohe, Martin Uribe.
Contributors: Uribe, Martin.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11417; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11417.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Business cycles -- United States.; Fiscal policy -- United States.; Monetary policy -- United States.
Description: "In this paper, we study Ramsey-optimal fiscal and monetary policy in a medium-scale model of the U.S.\ business cycle.  The model features a rich array of real and nominal rigidities that have been identified in the recent empirical literature as salient in explaining observed aggregate fluctuations.  The main result of the paper is that price stability appears to be a central goal of optimal monetary policy.  The optimal rate of inflation under an income tax regime is half a percent per year with a volatility of 1.1 percent.  This result is surprising given that the model features a number of frictions that in isolation would call for a volatile rate of inflation---particularly nonstate-contingent nominal public debt, no lump-sum taxes, and sticky wages.Under an income-tax regime, the optimal income tax rate is quite stable, with a mean of 30 percent and a standard deviation of 1.1 percent.  Simple monetary and fiscal rules are shown to implement a competitive equilibrium that mimics well the one induced by the Ramsey policy.  When the fiscal authority is allowed to tax capital and labor income at different rates, optimal fiscal policy is characterized by a large and volatile subsidy on capital"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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