TY  - JOUR
AU  - Schmitt-Grohe, Stephanie
AU  - Uribe, Martin
TI  - Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model: Expanded Version
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11417
PY  - 2005
Y2  - June 2005
DO  - 10.3386/w11417
UR  - http://www.nber.org/papers/w11417
L1  - http://www.nber.org/papers/w11417.pdf
N1  - Author contact info:
Stephanie Schmitt-Grohé
Department of Economics
Columbia University
420 West 118th Street, MC 3308
New York, NY 10027
Tel: 212/854-8059
Fax: 212/854-4010
E-Mail: stephanie.schmittgrohe@columbia.edu

Martín Uribe
Department of Economics
Columbia University
International Affairs Building
New York, NY 10027
Tel: 212 851 4008
Fax: 212 854 8059
E-Mail: martin.uribe@columbia.edu
M1  - published as Stephanie Schmitt-Grohé, Martín Uribe. "Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model," in Mark Gertler and Kenneth Rogoff, editors, "NBER Macroeconomics Annual 2005, Volume 20" MIT Press (2006)

AB  - In this paper,  we study Ramsey-optimal fiscal and monetary policy in a medium-scale model of the U.S.\ business cycle. The model features a rich array of real and nominal rigidities that have been identified in the recent empirical literature as salient in explaining observed aggregate fluctuations. The main result of the paper is that price stability appears to be a central goal of optimal monetary policy. The optimal rate of inflation under an income tax regime is half a percent per year with a volatility of 1.1 percent. This result is surprising given that the model features a number of frictions that in isolation would call for a volatile rate of inflation---particularly nonstate-contingent nominal public debt, no lump-sum taxes, and sticky wages.
Under an income-tax regime, the optimal income tax rate is quite stable, with a mean of 30 percent and a standard deviation of 1.1 percent.  Simple monetary and fiscal rules are shown to implement a competitive equilibrium that mimics well the one induced by the Ramsey policy.  When the fiscal authority is allowed to tax capital and labor income at different rates, optimal fiscal policy is characterized by a large and volatile subsidy on capital.
ER  -