Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153046
Authors: 
Schmitt-Grohé, Stephanie
Uribe, Martín
Year of Publication: 
2006
Series/Report no.: 
ECB Working Paper 612
Abstract: 
In this paper, we study Ramsey-optimal fiscal and monetary policy in a mediumscale 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.
Subjects: 
Inflation Stabilization
Nominal and Real Rigidities
Ramsey Policy
tax smoothing
Time to Tax
JEL: 
E52
E61
E63
Document Type: 
Working Paper

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