Optimal Fiscal and Monetary Policy by Applying the Ramsey Problem

Abstract

The aim of this study is to investigate optimal monetary and fiscal policies for the Iranian economy considering Ramsey problem. Using a Dynamic Stochastic General Equilibrium model, the effects of imposing various taxes such as consumption tax, capital income tax, labor income tax and profit tax are examined by different scenarios. The results indicate that Friedman’s rule, or zero inflation is determined as optimal monetary policy under scenarios with and without price rigidities. In addition, since the governments try to minimize the distortions from taxes levied on different economic sectors, necessity of a subsidy or negative tax is confirmed under Ramsey conditions. According to the findings, the inflation rate not only depends on nominal and real rigidities assumed in the model, but also to the number of instruments available to the Ramsey planner.

Keywords

• ramsey problem
• optimal policy
• friedman’s rule
• dsge
• simulation