Optimal Monetary and Fiscal Policy: A Linear Quadratic Approach
New York University - Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)
NBER Working Paper No. w9905
We propose an integrated treatment of the problems of optimal monetary and fiscal policy, for an economy in which prices are sticky and the only available sources of government revenue are distorting taxes. Our linear-quadratic approach allows us to nest both conventional analyses of optimal monetary stabilization policy and analyses of optimal tax-smoothing as special cases of our more general framework. We show how a linear-quadratic policy problem can be derived which yields a correct linear approximation to the optimal policy rules from the point of view of the maximization of expected discounted utility in a dynamic stochastic general-equilibrium model. Finally, we derive targeting rules through which the monetary and fiscal authorities may implement the optimal equilibrium.
Number of Pages in PDF File: 70working papers series
Date posted: August 19, 2003
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