Optimal Monetary and Fiscal Policy for Small Open and Emerging Economies

Abstract

This dissertation computes the optimal monetary and fiscal policy for small open and emerging economies in an estimated medium-scale model. The model departs from the conventional approach as it encompasses all the major nominal and real rigidities normally found in the literature in a single framework. After estimating the model using Bayesian techniques for one small open economy and one emerging economy, the Ramsey solution for the optimal monetary and fiscal policy is computed. Results show that foreign shocks have a strong influence in the dynamics of emerging economies, when compared to the designed optimal policy for a developed small open economy. For both economies, inflation is low, but very volatile, while taxes follow the traditional results in the literature with high taxes over labor income and low taxes for capital income.