Optimal fiscal and monetary policy without commitment

Stefan Niemann, Paul Pichler () and Gerhard Sorger
Additional contact information
Paul Pichler: https://econ.univie.ac.at

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: This paper studies optimal fiscal and monetary policy in a stochastic economy with imperfectly competitive product markets and a discretionary government. We find that, in the flexible price economy, optimal time-consistent policy implements the Friedman rule independently of the degree of imperfect competition. This result is in contrast to the Ramsey literature, where the Friedman rule emerges as the optimal policy only if markets are perfectly competitive. Second, once nominal rigidities are introduced, the Friedman rule ceases to be optimal, inflation rates are low and stable, and tax rates are relatively volatile. Finally, optimal time-consistent policy under sticky prices does not generate the near-random walk behavior of taxes and real debt that can be observed under optimal policy in the Ramsey problem. A common reason for these results is that the discretionary government, in an effort to asymptotically eliminate its time-consistency problem, accumulates a large net asset position such that it can finance its expenditures via the associated interest earnings.

JEL-codes: E31 E32 E61 E63 (search for similar items in EconPapers)
Date: 2008-06
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://papersecon.univie.ac.at/RePEc/vie/viennp/vie0808.pdf (application/pdf)

Related works:
Working Paper: Optimal Fiscal and Monetary Policy Without Commitment (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:vie:viennp:vie0808

Access Statistics for this paper

More papers in Vienna Economics Papers from University of Vienna, Department of Economics
Bibliographic data for series maintained by Paper Administrator ().