Laffer traps and monetary policy

Patrick Pintus ()

Review, 2008, issue May, pages 165-174

Abstract: This article focuses on the interaction, in a stylized economy with flexible prices, of monetary and fiscal policy when both are active-active in the sense that how the policy instrument is set depends on the state of the economy. Fiscal policy finances a given stream of government expenditures through distortionary labor taxes, and it operates under a strict balanced-budget rule. If monetary policy is passive, the economy may occasionally switch, because of self-fulfilling expectations, from the neighborhood of a "Laffer trap" equilibrium to the saddle-path leading to the high-welfare steady state. In the low-welfare stationary state, output, investment, and consumption are low while the tax rate is correspondingly high. However, active monetary policy may, by following a rule such that the nominal interest rate responds positively to the state of the economy, push the economy toward the high-welfare equilibrium and rule out expectation-driven business cycles.

Keywords: Monetary policy; Fiscal policy (search for similar items in EconPapers)
Date: 2008
View list of references

Downloads: (external link)
http://research.stlouisfed.org/publications/review/08/05/Pintus.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:fip:fedlrv:y:2008:i:may:p:165-174:n:v.90no.3,pt.1

Ordering information: This journal article can be ordered from
http://www.stls.frb. ... h/order/pubform.html

Access Statistics for this article

More articles in Review from Federal Reserve Bank of St. Louis
Contact information at EDIRC.
Series data maintained by Diane Rosenberger ().