Fiscal policy and inflation in a Monetary Unión by José - Miguel Cardoso - Costa and Vivien Lewis
By: Costa, José Manuel Moreira Cardoso da
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Contributor(s): Lewis, Vivien.
Material type: 
ArticlePublisher: 2017Subject(s): UNION ECONOMICA Y MONETARIA | POLITICA FISCAL | INFLACION | POLITICA ANTIINFLACIONISTA | MODELOS ECONOMETRICOS
In:
Economica v. 84, n. 336, October 2017, p. 779-796Summary: We study optimal fiscal policies in a small monetary union country. The government uses nominal nonstate-contingent debt and distortionary labour taxes to finance exogenous spending. Price levels differ across countries due toconsumption home bias; thus fiscal policy influences inflation and the terms oftrade. Prices are flexible. We show that, unlike in a country with an independent monetary policy, somevariability in labour taxes is optimal. With nominal public debt there is an incentive to use taxes to inflate in bad times when debt levels are high, reminiscent of the optimal monetary policy result of Chari et al.(1991).
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| OP 283/2016/330-3 The impact of Government debt, expenditure and taxes on aggregate investment and productivity growth | OP 283/2017/334 Special issue on inequality | OP 283/2017/336-1 On a World Climate Assembly and the social cost of carbon | OP 283/2017/336-2 Fiscal policy and inflation in a Monetary Unión | OP 283/2018/338 Economica | OP 283/2018/339 Economica | OP 283/2019/341 Economica |
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We study optimal fiscal policies in a small monetary union country. The government uses nominal nonstate-contingent debt and distortionary labour taxes to finance exogenous spending. Price levels differ across countries due toconsumption home bias; thus fiscal policy influences inflation and the terms oftrade. Prices are flexible. We show that, unlike in a country with an independent monetary policy, somevariability in labour taxes is optimal. With nominal public debt there is an incentive to use taxes to inflate in bad times when debt levels are high, reminiscent of the optimal monetary policy result of Chari et al.(1991).
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