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SOME WELFARE IMPLICATIONS OF OPTIMAL STABILISATION POLICY IN AN ECONOMY WITH CAPITAL AND STICKY PRICES
Author(s) -
Damjanovic Tatiana,
Nolan Charles
Publication year - 2006
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.2006.00370.x
Subject(s) - economics , inflation (cosmology) , capital (architecture) , deadweight loss , welfare , macroeconomics , monetary policy , keynesian economics , construct (python library) , monetary economics , point (geometry) , microeconomics , market economy , history , physics , geometry , mathematics , theoretical physics , computer science , programming language , archaeology
In this paper we review and extend some of the key lessons that seem to be emerging from the Ramsey‐inspired theory of dynamic optimal monetary and fiscal policies. We construct measures of the key distortions in our economy; we label these ‘dynamic wedges’. Inflation, actual or anticipated, distorts these wedges in the present period, shrinks the tax base and increases the deadweight loss. We show that, if possible, labour as well as capital ought to be subsidised in steady state. We point to a number of extensions to the Ramsey literature that may help in the formulation of actual policy.