NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Optimal Simple and Implementable Monetary and Fiscal Rules

Stephanie Schmitt-Grohe, Martin Uribe

NBER Working Paper No. 10253
Issued in January 2004
NBER Program(s):   ME

The goal of this paper is to compute optimal monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple policy rules whereby the nominal interest rate is set as a function of output and inflation, and taxes are set as a function of total government liabilities. We require policy to be implementable in the sense that it guarantees uniqueness of equilibrium. We do away with a number of empirically unrealistic assumptions typically maintained in the related literature that are used to justify the computation of welfare using linear methods. Instead, we implement a second-order accurate solution to the model. Our main findings are: First, the size of the inflation coefficient in the interest-rate rule plays a minor role for welfare. It matters only insofar as it affects the determinacy of equilibrium. Second, optimal monetary policy features a muted response to output. More importantly, interest rate rules that feature a positive response of the nominal interest rate to output can lead to significant welfare losses. Third, the optimal fiscal policy is passive. However, the welfare losses associated with the adoption of an active fiscal stance are negligible.

download in pdf format
   (1350 K)

email paper

This paper is available as PDF (1350 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10253

Published: Schmitt-Grohe, Stephanie and Martin Uribe. "Optimal Simple and Implementable Monetary and Fiscal Rules." Journal of Monetary Economics 54, 6 (September 2007): 1702-25. citation courtesy of

Users who downloaded this paper also downloaded these:
Schmitt-Grohe and Uribe w12402 Optimal Simple and Implementable Monetary and Fiscal Rules: Expanded Version
Schmitt-Grohe and Uribe w10724 Optimal Operational Monetary Policy in the Christiano-Eichenbaum-Evans Model of the U.S. Business Cycle
Schmitt-Grohe and Uribe Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model
Schmitt-Grohe and Uribe w11417 Optimal Fiscal and Monetary Policy in a Medium-Scale Macroeconomic Model: Expanded Version
Schmitt-Grohe and Uribe w10149 Optimal Fiscal and Monetary Policy Under Imperfect Competition
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us