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Optimal Fiscal and Monetary Policy in Customer Markets

David Arseneau, Ryan Chahrour, Sanjay Chugh and Alan Finkelstein Shapiro ()

No 842, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper presents a model in which some goods trade in "customer markets." In these markets, advertising plays a critical role in facilitating long-lived relationships. We estimate both policy and non-policy parameters of the model (which includes New-Keynesian frictions) on U.S. data, including advertising expenditures. The estimated parameters imply a large congestion externality in the pricing of customer market goods. This pricing inefficiency motivates the analysis of optimal policy. When the planner has access to a complete set of taxes and chooses them optimally, fiscal policy eliminates the externalities with large adjustments in the tax rates that operate directly in customer markets; labor tax volatility remains low. If available policy instruments are constrained to the interest rate and labor tax, then the latter displays large and procyclical fluctuations, while the implications for monetary policy are largely unchanged from the model with no customer markets.

Keywords: fiscal policy; monetary policy; advertising; customer markets (search for similar items in EconPapers)
JEL-codes: E30 E50 E61 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2013-11-18
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Published, Journal of Money, Credit and Banking, 2015, 47, 617-672

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Related works:
Journal Article: Optimal Fiscal and Monetary Policy in Customer Markets (2015) Downloads
Working Paper: Optimal fiscal and monetary policy in customer markets (2008) Downloads
Working Paper: Optimal Fiscal and Monetary Policy in Customer Markets (2008) Downloads
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