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
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: Suggested Citation
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