Optimal Fiscal and Monetary Policy under Imperfect Competition

Martín Uribe () and Schmitt-Grohé, Stephanie
Authors registered in the RePEc Author Service: Stephanie Schmitt-Grohe

No 2688, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper studies optimal fiscal and monetary policy under imperfect competition in a stochastic, flexible-price, production economy without capital. It shows analytically that in this economy the nominal interest rate acts as an indirect tax on monopoly profits. Unless the social planner has access to a direct 100% tax on profits, he will always find it optimal to deviate from the Friedman rule by setting a positive and time-varying nominal interest rate. The dynamic properties of the Ramsey allocation are characterized numerically. As in the perfectly competitive case, the labour income tax is remarkably smooth, whereas inflation is highly volatile and serially uncorrelated. An exact numerical solution method to the Ramsey conditions is proposed.

Keywords: Optimal fiscal and monetary policy; Imperfect competition; Ramsey equilibria (search for similar items in EconPapers)
JEL-codes: E52 E61 E63 (search for similar items in EconPapers)
Date: 2001-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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Related works:
Journal Article: Optimal fiscal and monetary policy under imperfect competition (2004)
Working Paper: Optimal Fiscal and Monetary Policy Under Imperfect Competition (2003)
Working Paper: Optimal Fiscal and Monetary Policy under Imperfect Competition (2001)
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