Optimal Fiscal and Monetary Policy with Sticky Prices ∗

  title={Optimal Fiscal and Monetary Policy with Sticky Prices ∗},
  author={Henry E. Siu},
This paper considers the role of state-contingent inflation as a fiscal shock absorber in an economy with nominal rigidities. I study the Ramsey equilibrium in a monetary model with distortionary taxation, nominal non-state-contingent debt, and sticky prices. With sticky prices, the Ramsey planner must balance the shock absorbing benefits of state-contingent inflation against the associated resource misallocation costs. For government spending processes resembling post-war experience… CONTINUE READING
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