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http://ssrn.com/abstract=255411
 
 

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Optimal Fiscal and Monetary Policy Under Imperfect Competition


Martin Uribe


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

Stephanie Schmitt-Grohe


Duke University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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.

Number of Pages in PDF File: 28

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

JEL Classification: E52, E61, E63

working papers series





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Date posted: January 29, 2001  

Suggested Citation

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

Contact Information

Martin Uribe (Contact Author)
Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )
420 W. 118th Street
1022 International Affairs Building, MC 3308
New York, NY 10027
United States
212-851-4008 (Phone)
212-854-8059 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Stephanie Schmitt-Grohe
Duke University - Department of Economics ( email )
213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1889 (Phone)
919-684-8974 (Fax)
HOME PAGE: http://www.econ.duke.edu/~grohe
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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