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Welfare-Maximizing Operational Monetary and Tax Policy Rules

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  • Kollmann, Robert

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.

Suggested Citation

  • Kollmann, Robert, 2004. "Welfare-Maximizing Operational Monetary and Tax Policy Rules," CEPR Discussion Papers 4782, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4782
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    More about this item

    Keywords

    Monetary policy; Fiscal policy; Welfare;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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