Some Welfare Implications of Optimal Stabilization Policy in an Economy with Capital and Sticky Prices

Centre for Dynamic Macroeconomic Analysis Working Paper No. 0509

41 Pages Posted: 16 Aug 2005

See all articles by Tatiana Damjanovic

Tatiana Damjanovic

University of St. Andrews - School of Economics and Finance

Charles Nolan

University of St. Andrews

Date Written: July 2005

Abstract

In this paper we review and extend some of the key lessons that seem to be emerging from the Ramsey-inspired theory of dynamic optimal monetary and fiscal policies. We construct measures of the key distortions in our economy; we label these 'dynamic wedges'. Inflation, actual or anticipated, distorts these wedges in the present period, it shrinks the tax base and increases the deadlweight loss. We show that, if possible, labour as well as capital ought to be subsidized in steady state. We point to a number of extensions to the Ramsey literature that may help in the formulation of actual policy.

Keywords: Optimal taxation, aggregative monetary and fiscal policies.

JEL Classification: E31, E61, E62, H21

Suggested Citation

Damjanovic, Tatiana and Nolan, Charles, Some Welfare Implications of Optimal Stabilization Policy in an Economy with Capital and Sticky Prices (July 2005). Centre for Dynamic Macroeconomic Analysis Working Paper No. 0509, Available at SSRN: https://ssrn.com/abstract=779026 or http://dx.doi.org/10.2139/ssrn.779026

Tatiana Damjanovic

University of St. Andrews - School of Economics and Finance ( email )

The Scores, Castlecliff
St. Andrews, Fife KY16 9AL
United Kingdom

HOME PAGE: http://www.st-andrews.ac.uk/economics/staff/pages.t.damjanovic.shtml

Charles Nolan (Contact Author)

University of St. Andrews ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom