Optimal Fiscal and Monetary Policy Under Imperfect Competition

28 Pages Posted: 29 Jan 2001

See all articles by Martín Uribe

Martín Uribe

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Stephanie Schmitt-Grohé

Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: January 2001

Abstract

This paper studies optimal fiscal and monetary policy under imperfect competition in a stochastic, flexible-price, production economy without capital. It shows analytically that in this economy the nominal interest rate acts as an indirect tax on monopoly profits. Unless the social planner has access to a direct 100 percent tax on profits, he will always find it optimal to deviate from the Friedman rule by setting a positive and time-varying nominal interest rate. The dynamic properties of the Ramsey allocation are characterized numerically. As in the perfectly competitive case, the labor income tax is remarkably smooth, whereas inflation is highly volatile and serially uncorrelated. An exact numerical solution method to the Ramsey conditions is proposed.

Keywords: Optimal Fiscal and Monetary Policy, Friedman rule, Imperfect competition

JEL Classification: E52, E61, E63

Suggested Citation

Uribe, Martin and Schmitt-Grohe, Stephanie, Optimal Fiscal and Monetary Policy Under Imperfect Competition (January 2001). Available at SSRN: https://ssrn.com/abstract=255411 or http://dx.doi.org/10.2139/ssrn.255411

Martin Uribe (Contact Author)

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

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Stephanie Schmitt-Grohe

Centre for Economic Policy Research (CEPR) ( email )

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