Optimal Fiscal and Monetary Policy: Equivalence Results

Correia, Isabel; Nicolini, Juan Pablo; Teles, Pedro

doi:10.1086/533504

Cited by 124 publications

(97 citation statements)

References 29 publications

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“…At the beginning of every period after observing the shock, sellers have to pay the cost   0 in terms of disutility to enter the second market. 10 The set of potential sellers is denoted F. Let S ⊆ F denote the set of sellers that pay the utility cost  to enter the second market. We assume that the set of potential sellers F is so large that S ⊂ F. Let  denote the measure of S. The set of households is denoted by H, whose size is normalized to 2.…”

Section: Free Entry and Search Frictionsmentioning

confidence: 99%

“…Our results rely on the assumption that fiscal policy is absent or impotent as an instrument to control entry. Correia, Nicolini and Teles (2008) show in monetary economies with sticky prices that the efficient allocation can be implemented if fiscal and monetary policies are chosen optimally. In our environment, if the government were to design the tax system such that all entry externalities are internalized, the Friedman rule would implement the first-best allocation.…”

Section: Introductionmentioning

confidence: 99%

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Optimal Stabilization Policy With Search Externalities

Berentsen

Waller

2013

Macroecon. Dynam.

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We study optimal monetary stabilization policy in a DSGE model with microfounded money demand. A search externality creates 'congestion' which causes aggregate output to be inefficient. Due to the informational frictions that give rise to money, households are unable to perfectly insure themselves against aggregate shocks. This gives rise to a welfare improving role for monetary policy that works by adjusting the nominal interest rate in response to these shocks. Optimal policy is determined by choosing a set of state-contingent nominal interest rates to maximize the expected lifetime utility of the agents subject to the constraints of being an equilibrium.

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Section: Free Entry and Search Frictionsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Optimal Stabilization Policy With Search Externalities

Berentsen

Waller

2013

Macroecon. Dynam.

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“…Such a concern can be justified by, for example, the results of Correia, Nicolini, and Teles (2002), who show in a sticky-price Ramsey model that a rich set of instruments can allow for the Friedman Rule to re-emerge, albeit as part of a non-generic policy. Such a conclusion carries over to our model as well -however, as we show, allowing for a wide range of natural instruments that could be used in the DM or the CM does not alter the basic prescription that DM activity should be taxed.…”

Section: Optimal Deviation From the Friedman Rulementioning

confidence: 99%

Optimal fiscal and monetary policy when money is essential

Aruoba

Chugh

2010

Journal of Economic Theory

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We study optimal fiscal and monetary policy in an environment where explicit frictions give rise to valued money, making money essential in the sense that it expands the set of feasible trades. Our main results are in stark contrast to the prescriptions of earlier flexible-price Ramsey models. The two most important findings that emerge from our work are that the Friedman Rule is typically not optimal and inflation is very stable over time. Inflation is not a substitute instrument for a missing tax, as is sometimes the case in standard Ramsey models. Rather, the inflation tax is the natural tax to use because trades using money have rents associated with them. Regarding the optimal dynamic policy, realized (ex-post) inflation is quite stable over time, in contrast to the very volatile ex-post inflation rates that arise in standard flexibleprice Ramsey models. Taken together, these findings turn conventional wisdom from traditional Ramsey monetary models on its head.

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“…4 Examples of papers in the literature that optimize two or more tax instruments in the context of simpler NK models are Correia et al (2008) and Correia et al (2013), who use tax policy to neutralize price stickiness and to stimulate the economy at the zero lower bound, respectively.…”

Section: Equilibriummentioning

confidence: 99%

Optimal Fiscal and Monetary Policy, Debt Crisis and Management

et al. 2017

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The initial government debt-to-GDP ratio and the government's commitment play a pivotal role in determining the welfare-optimal speed of fiscal consolidation in the management of a debt crisis. Under commitment, for low or moderate initial government debt-to-GPD ratios, the optimal consolidation is very slow. A faster pace is optimal when the economy starts from a high level of public debt implying high sovereign risk premia, unless these are suppressed via a bailout by official creditors. Under discretion, the cost of not being able to commit is reflected into a quick consolidation of government debt. Simple monetary-fiscal rules with passive fiscal policy, designed for an environment with "normal shocks", perform reasonably well in mimicking the Ramsey-optimal response to one-off government debt shocks. When the government can issue also long-term bonds -under commitment -the optimal debt consolidation pace is slower than in the case of short-term bonds only, and entails an increase in the ratio between long and short-term bonds.

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Optimal Fiscal and Monetary Policy: Equivalence Results

Cited by 124 publications

References 29 publications

Optimal Stabilization Policy With Search Externalities

Optimal Stabilization Policy With Search Externalities

Optimal fiscal and monetary policy when money is essential

Optimal Fiscal and Monetary Policy, Debt Crisis and Management

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