Optimal Fiscal and Monetary Policy
نویسنده
چکیده
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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