Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model
By Stephanie Schmitt-Grohé, Martin Uribe. NBER macroeconomics annual, 2005
429 citations recorded by the source corpus.
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 1/2 percent per year, with a volatility of 1.1 percent. This result is surprising given that the model features a number of frictions-particularly nonstate-contingent nominal public debt, no lump-sum taxes, and sticky wages-that, in isolation, would call for a volatile rate of inflation. 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.
Subfields: Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/ab5d840e4dc6397a56fda1477334852f8e1f5490
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In Economics and Econometrics
- G. Ascari
- Stephanie Schmitt-Grohé
- Martin Uribe
- Roland Straub
- Guenter Coenen
- Tiziano Ropele
- Peter Mcadam
- Stefano Eusepi
Citations in the corpus
- Disinflation in a DSGE perspective: sacrifice ratio or welfare gain ratio? (2012, methodology): “It is well-known that a positive steady state in ation rate increases steady state price and wage dispersion in the absence of full indexation, yielding an ine¢ ciency loss on aggregate production (e.g., Ascari, 2004, Schmitt-Grohé and Uribe, 2005, Yun, 2005).”
- Macroprudential Rules and Monetary Policy when Financial Frictions Matter (2015, background): “6 (34) Thus, the resource constraint in the model is given by F (Kt, Lt) = (Ct + C e t + It + ξ 2 ( It Kt − δ )2 Kt)Γt, (35) 6See Schmitt-Grohe and Uribe (2006) for details.”