Working Paper: NBER ID: w2084
Authors: Stephen J. Turnovsky
Abstract: This paper emphasizes how the choice of the optimal monetary growth rate in a small open economy under perfect capital mobility depends upon the accommodating policy chosen to maintain the overall budget constraint in the economy. When this occurs through lump sum taxation, the optimal monetary growth rate is shown to be the "distorted" Friedman monetary rule. If the adjustment occurs through the income tax rate, the optimal monetary growth rate involves a Phelps-type tradeoff between the income tax rate and the inflation tax rate. The framework is suited for analyzing optimal macroeconomic policy in general and the latter part of the paper considers an optimal monetary-fiscal package.
Keywords: monetary growth; fiscal policy; small open economy; optimal policy
JEL Codes: E52; E63; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal monetary growth rate (lump sum taxation) (E19) | distorted Friedman monetary rule (E19) |
| income tax rate adjustment (H29) | optimal monetary growth rate (O42) |
| income tax rate (H26) | optimal monetary growth rate (O42) |
| fiscal policy variable (E62) | optimal monetary growth rate (O42) |
| optimal monetary growth rate (O42) | nominal interest rate approaches zero (E43) |
| optimal policy requires balancing direct utility of money (D15) | indirect effects on consumption and labor supply (H31) |