Optimal Monetary Growth with Accomodating Fiscal Policy in a Small Open Economy

26 Pages Posted: 19 Jun 2004 Last revised: 12 Sep 2022

See all articles by Stephen J. Turnovsky

Stephen J. Turnovsky

University of Washington - Institute for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: November 1986

Abstract

This paper emphasizes how the choice of the optimal monetary growth rate in a small open economy under perfect capital mobility depends upon the accommodating policy chosen to maintain the overall budget constraint in the economy. When this occurs through lump sum taxation, the optimal monetary growth rate is shown to be the "distorted" Friedman monetary rule. If the adjustment occurs through the income tax rate, the optimal monetary growth rate involves a Phelps-type tradeoff between the income tax rate and the inflation tax rate. The framework is suited for analyzing optimal macroeconomic policy in general and the latter part of the paper considers an optimal monetary-fiscal package.

Suggested Citation

Turnovsky, Stephen J., Optimal Monetary Growth with Accomodating Fiscal Policy in a Small Open Economy (November 1986). NBER Working Paper No. w2084, Available at SSRN: https://ssrn.com/abstract=270359

Stephen J. Turnovsky (Contact Author)

University of Washington - Institute for Economic Research ( email )

Seattle, WA 98195
United States
206-685-8028 (Phone)
206-543-5955 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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