Optimal monetary and fiscal policy: a linear-quadratic approach
Pierpaolo Benigno and
Michael Woodford ()
No 345, Working Paper Series from European Central Bank
We propose an integrated treatment of the problems of optimal monetary and fiscal policy, for an economy in which prices are sticky and the only available sources of government revenue are distorting taxes. Our linear-quadratic approach allows us to nest both conventional analyses of optimal monetary stabilization policy and analyses of optimal tax-smoothing as special cases of our more general framework. We show how a linear-quadratic policy problem can be derived which yields a correct linear approximation to the optimal policy rules from the point of view of the maximization of expected discounted utility in a dynamic stochastic general-equilibrium model. Finally, we derive targeting rules through which the monetary and fiscal authorities may implement the optimal equilibrium. JEL Classification: E52, E61, E63
Keywords: loss function; output gap; targeting rules; tax smoothing (search for similar items in EconPapers)
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Chapter: Optimal Monetary and Fiscal Policy: A Linear-Quadratic Approach (2004)
Working Paper: Optimal monetary and fiscal policy: a linear-quadratic approach (2004)
Journal Article: Optimal monetary and fiscal policy: a linear-quadratic approach (2003)
Working Paper: Optimal Monetary and Fiscal Policy: A Linear Quadratic Approach (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:2004345
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