Optimal fiscal and monetary policy under imperfect competition

  title={Optimal fiscal and monetary policy under imperfect competition},
  author={Stephanie Schmitt-Groh},
  • Stephanie Schmitt-Groh
  • Published 2004
This paper studies optimal fiscal and monetary policy under imperfect competition in a stochastic, flexible-price, production economy without capital. It shows analytically that in this economy the nominal interest rate acts as an indirect tax on monopoly profits. Unless the social planner has access to a direct 100 percent tax on profits, he will always find it optimal to deviate from the Friedman rule by setting a positive and time-varying nominal interest rate. The dynamic properties of the… CONTINUE READING
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