Monetary and Fiscal Rules for Open Economies: Operational Welfare% Improving Policy Design (original) (raw)

Abstract

This paper examines the interaction of monetary and …scal policies in open economies subject to distortionary monopolistic competition. Taxes may be lump sum or levied on labor income or consumption, and households accumulate both foreign assets and domestic government bonds. Under a balanced budget rule with lump-sum taxation, the welfare-improving monetary policy targets in‡ation and output growth and engages in interestrate smoothing. Under consumption or income taxes, which should vary with productivity, the best welfare-improving monetary policy targets in‡ation and output growth but does not engage in interest-rate smoothing.

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