Optimal Fiscal and Monetary Policy with Durable Goods

Liutang Gong, Feng Shi () and Chan Wang
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Feng Shi: Guanghua School of Management and LMEQF, Peking University

Annals of Economics and Finance, 2018, vol. 19, issue 2, 729-748

Abstract: In this paper, we examine the question of how to conduct fiscal and monetary policy in a two-sector Ramsey model with durable and non-durable goods. Due to the fact that the intertemporal elasticity of substitution of durable goods is much higher than that of non-durable goods, the introduction of durable goods changes the policy prescriptions substantially. Specifically, in comparison with the findings in the literature, we find that the labor income tax rate and the interest rate exhibit greater volatility. In addition, the volatilities of the labor income tax rate and the interest rate increase with the decrease in the depreciation rate of durable goods.

Keywords: Durable goods; Fiscal and monetary policy; Volatility of the labor income tax rate; Interest rate volatility (search for similar items in EconPapers)
JEL-codes: E52 E61 E63 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2018:v:19:i:2:gong:shi:wang

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