Learning by Doing and Optimal Fiscal and Monetary Policy

Abstract

<p> This thesis studies a number of issues in optimal fiscal and monetary policy using the Ramsey framework. Specifically, it focuses on the effects of learning-by-doing and organizational capital on optimal policy responses. The first essay investigates the optimal capital income taxation in presence of learning-by-doing effects. The main result is that the optimal tax rate on capital income is significantly positive in the long run even though the product market is imperfectly competitive. This finding contrasts with results obtained in the literature that the capital income tax should be zero if the product market is perfectly competitive and negative if the product market is imperfectly competitive. The second essay studies the effects of learning-by-doing, and price rigidities on the dynamic properties of optimal fiscal and monetary policy variables. The m~in result is that, contrary to the findings of other papers in this literature, optimal Ramsey inflation is very stable and persistent over the business cycle. A second important result is that optimal tax policy is counter-cyclical - tax rates fall during recession and rise during boom. This finding contrasts with pro-cyclical tax results obtained in standard sticky price Ramsey models. Finally, the third essay studies welfare maximizing fiscal and monetary policy rules in a model with sticky prices, learning-by-doing in the technology, and distortionary taxation. Specifically, it considers monetary feedback rules whereby the nominal interest rate is set as a function of 'output and inflation. The main finding is that the optimal interest-rate rules call for a very strong response to inflation and a very weak response to output. Also, the optimal interest-rate rules are forward looking. This result contrasts with the backward looking optimal interest rate rules obtained in the existing optimal policy literature. The optimized fiscal rule is passive in the sense that tax revenues increase only mildly in response to increases in government liabilities. The optimized regime yields a level of welfare that is very close to that implied by the Ramsey optimal policy. </p>