EconPapers    
Economics at your fingertips  
 

Operational Fiscal and Monetary Policy with Staggered Wage and Price Dynamics

Paolo Zagaglia

Finnish Economic Papers, 2007, vol. 20, issue 2, 121-138

Abstract: I consider the optimal setup of simple rules for monetary and tax policy in a model with distortionary taxes, wage and price stickiness. The rules maximize a measure of households’ intertemporal utility. The model is solved through the second-order approximation method of Schmitt-Grohé and Uribe (2004). When both prices and wages are indexed to steady-state inflation, the average tax rate responds little to government liabilities. This arises from the need to minimize the inefficient distortions arising from fluctuations in the price level for fiscal reasons. Optimal monetary policy responds strongly to changes in wages. In an economy with only wage rigidity, fiscal considerations prevail over the need to stabilize wage fluctuations, and the policy mix produces a large variability of inflation. Finally, with indexation of wages and prices to lagged inflation, the dynamic behavior of the economy is closer to the frictionless equilibrium, and the optimal policy mix resembles the one under flexible prices and sticky wages.

JEL-codes: E52 E61 E63 (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.taloustieteellinenyhdistys.fi/images/st ... ep22007_zagaglia.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: https://EconPapers.repec.org/RePEc:fep:journl:v:20:y:2007:i:2:p:121-138

Access Statistics for this article

More articles in Finnish Economic Papers from Finnish Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Editorial Secretary ().

 
Page updated 2019-08-03
Handle: RePEc:fep:journl:v:20:y:2007:i:2:p:121-138