Optimal Fiscal and Monetary Policy Under Imperfect Competition

Stephanie Schmitt-Grohe and Martín Uribe ()

No 10149, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies optimal fiscal and monetary policy under imperfect competition in a stochastic, flexible-price, production economy without capital. It shows analytically that in this economy the nominal interest rate acts as an indirect tax on monopoly profits. Unless the social planner has access to a direct 100 percent tax on profits, he will always find it optimal to deviate from the Friedman rule by setting a positive and time-varying nominal interest rate. The dynamic properties of the Ramsey allocation are characterized numerically. As in the perfectly competitive case, the labor income tax is remarkably smooth, whereas inflation is highly volatile and serially uncorrelated. An exact numerical solution method to the Ramsey conditions is proposed.

JEL-codes: E52 E61 (search for similar items in EconPapers)
Date: 2003-12
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: EFG ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Optimal fiscal and monetary policy under imperfect competition," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 183-209, June.

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Related works:
Journal Article: Optimal fiscal and monetary policy under imperfect competition (2004)
Working Paper: Optimal Fiscal and Monetary Policy under Imperfect Competition (2001)
Working Paper: Optimal Fiscal and Monetary Policy under Imperfect Competition (2001)
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