Staff Report 147

Optimal Fiscal and Monetary Policy: Some Recent Results

Patrick J. Kehoe | Stanford University, University College London, Federal Reserve Bank of Minneapolis
V. V. Chari | Consultant
Lawrence J. Christiano | Consultant

Published November 1, 1991

This paper studies the quantitative properties of fiscal and monetary policy in business cycle models. In terms of fiscal policy, optimal labor tax rates are virtually constant and optimal capital income tax rates are close to zero on average. In terms of monetary policy, the Friedman rule is optimal—nominal interest rates are zero—and optimal monetary policy is activist in the sense that it responds to shocks to the economy.

Published In: Journal of Money, Credit, and Banking (Vol 23, Num 3, August 1991 (part 2), pp. 519-539)
Published In: Political economy, growth, and business cycles (1992, pp. 283-305)

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