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Optimal fiscal and monetary policy with sticky wages and sticky prices
2006
Review of economic dynamics (Print)
We determine the optimal degree of price inflation volatility when nominal wages are sticky and the government uses state-contingent inflation to finance government spending. We address this question in a well-understood Ramsey model of fiscal and monetary policy, in which the benevolent planner has access to labor income taxes, nominally risk-free debt, and money creation. Our main result is that sticky wages alone make price stability optimal in the face of shocks to the government budget, to
doi:10.1016/j.red.2006.07.001
fatcat:6zq2mwdppfgp3m67dpmo6nmuqy