Ramsey Policies in a Small Open Economy with Sticky Prices and Capital

Stéphane Auray, Beatriz de Blas () and Aurélien Eyquem

Cahiers de recherche from Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke

Abstract: In this paper we study jointly optimal ¯scal and monetary policies in a small open economy framework with capital and sticky prices. We consider the case of distor- tionary taxes on labor and capital, and no public debt. As in a closed economy set{up, in the steady state, the optimal in°ation rate is zero, as well as the optimal tax on capital. The dynamic properties of optimal monetary and ¯scal policies in an open economy are qualitatively the same as those of a closed economy: the tax rate on capital income remains constant over the cycle, while both the nominal interest rate and the tax rate on labor income move although very smoothly, respectively to minimize the distortions implied by nominal rigidities and balance the budget.

Keywords: small open economy; sticky prices; optimal monetary and ¯scal policies (search for similar items in EconPapers)
JEL-codes: E52 E62 E63 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2009-06-15
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Persistent link: http://EconPapers.repec.org/RePEc:shr:wpaper:09-12

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