Download this Paper Open PDF in Browser

Optimal Fiscal and Monetary Policy Under Imperfect Competition

28 Pages Posted: 29 Jan 2001  

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, Martín and Schmitt-Grohé, 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 )

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

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
982
Rank
16,817
Abstract Views
5,201