Optimal Fiscal Policy without Commitment: Revisiting Lucas-Stokey

Optimal fiscal and monetary policy without commitment∗

This paper studies optimal fiscal and monetary policy in a stochastic economy with imperfectly competitive product markets and a discretionary government. We find that, in the flexible price economy, optimal time-consistent policy implements the Friedman rule independently of the degree of imperfect competition. This result is in contrast to the Ramsey literature, where the Friedman rule emerge...

Optimal monetary policy without commitment

Most of the results of optimal taxation literature in Ramsey framework are derived under the assumption of commitment. Commitment is usually defined as ability of a government to bind future policy choices. This assumption is restrictive. A government, even a benevolent one, may choose to change its policies from those promised at an earlier date. The first formalization of the notion of time-i...

Fiscal policy under loose commitment

Due to time-inconsistency or political turnover, policymakers’ promises are not always fulfilled. We analyze an optimal fiscal policy problem where the plans made by the benevolent government are periodically revised. In this loose commitment setting, the properties of labor and capital income taxes are significantly different than under the full-commitment and no-commitment assumptions. Becaus...

Optimal Fiscal Policy With Oil Revenues

Optimal Fiscal and Monetary Policy

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 ...