Welfare-Maximizing Operational Monetary and Tax Policy Rules

Robert Kollmann ()

No 4782, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper computes welfare-maximizing monetary and tax policy feedback rules, in a calibrated dynamic general equilibrium model with sticky prices. The government makes exogenous final good purchases, levies a proportional income tax, and issues nominal one-period bonds. A quadratic approximation method is used to solve the model, and to compute household welfare. Optimized policy has a strong anti-inflation stance and implies persistent fluctuations of the tax rate and of public debt. Very simple optimized policy rules, under which the interest rate just responds to inflation and the tax rate just responds to public debt, yield a welfare level very close to that generated by richer rules.

Keywords: fiscal policy; monetary policy; welfare (search for similar items in EconPapers)
JEL-codes: E50 E60 H60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-pbe
Date: 2004-12
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Related works:
Journal Article: WELFARE-MAXIMIZING OPERATIONAL MONETARY AND TAX POLICY RULES (2008)
Working Paper: Welfare maximizing operational monetary and tax policy rules (2008)
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