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WELFARE-MAXIMIZING OPERATIONAL MONETARY AND TAX POLICY RULES

Published online by Cambridge University Press:  01 April 2008

ROBERT KOLLMANN
ROBERT KOLLMANN*
Affiliation:
ECARES, Université Libre de Bruxelles, University of Paris XII and Centre for Economic Policy Research, United Kingdom
*
Address correspondence to: Robert Kollmann, European Centre for Advanced Research in Economics and Statistics, ECARES, Université Libre de Bruxelles, 50, Avenue Franklin D. Roosevelt, B-1050 Brussels, Belgium; e-mail: [email protected].
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Abstract

This paper computes welfare-maximizing monetary and tax policy feedback rules in a calibrated dynamic general equilibrium model with sticky prices. The government makes exogenous final good purchases, levies a proportional income tax, and issues nominal one-period bonds. A quadratic approximation method is used to solve the model and to compute household welfare. Optimized policy has a strong anti-inflation stance and implies persistent fluctuations of the tax rate and of public debt. Very simple optimized policy rules, under which the interest rate just responds to inflation and the tax rate just responds to public debt, yield a welfare level very close to that generated by richer rules.

Keywords

Monetary PolicyFiscal PolicyWelfare
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Supplement S1: Dynamic Macroeconomic Theory , April 2008 , pp. 112 - 125
Copyright
Copyright © Cambridge University Press 2008

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