Optimal Monetary Growth with Accomodating Fiscal Policy in a Small Open Economy

Stephen J Turnovsky

No 2084, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper emphasizes how the choice of the optimal monetary growth rate in a small open economy under perfect capital mobility depends upon the accommodating policy chosen to maintain the overall budget constraint in the economy. When this occurs through lump sum taxation, the optimal monetary growth rate is shown to be the "distorted" Friedman monetary rule. If the adjustment occurs through the income tax rate, the optimal monetary growth rate involves a Phelps-type tradeoff between the income tax rate and the inflation tax rate. The framework is suited for analyzing optimal macroeconomic policy in general and the latter part of the paper considers an optimal monetary-fiscal package.

Date: 1986-11
Note: ITI IFM
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Published as Turnovsky, Stephen J. "Optimal Monetary Growth with Accomodating Fiscal Policy in a Small Open Economy," Journal of International Money and Finance, Vol. 6, No. 2, June 1987, pp. 179-193.

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Journal Article: Optimal monetary growth with accommodating fiscal policy in a small open economy (1987)
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