Fiscal hedging with nominal assets

Hanno Lustig, Christopher Sleet and Sevin Yeltekin ()

Journal of Monetary Economics, 2008, vol. 55, issue 4, 710-727

Abstract: We analyze optimal fiscal and monetary policy in an economy with distortionary labor income taxes, nominal rigidities, nominal debt of various maturities and short-selling constraints. Optimal policy prescribes the almost exclusive use of long term debt. Such debt mitigates the distortions associated with hedging fiscal shocks by allowing the government to allocate them efficiently across states and periods.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:55:y:2008:i:4:p:710-727

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