Optimal Monetary and Fiscal Policy: A Linear Quadratic Approach

Pierpaolo Benigno and Michael Woodford

No 9905, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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-codes: E52 E61 (search for similar items in EconPapers)
Date: 2003-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (243)

Published as P. Benigno & M. Woodford, 2003. "Optimal monetary and fiscal policy: a linear-quadratic approach," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
Published as Optimal Monetary and Fiscal Policy: A Linear-Quadratic Approach , Pierpaolo Benigno, Michael Woodford. in NBER Macroeconomics Annual 2003, Volume 18 , Gertler and Rogoff. 2004

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Related works:
Chapter: Optimal Monetary and Fiscal Policy: A Linear-Quadratic Approach (2004)
Working Paper: 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)
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