Optimal Fiscal and Monetary Policy when Money is Essential
S. Boragan Aruoba and Sanjay K. Chugh ,
( 145 )
Journal of Economic Theory

We study optimal fiscal and monetary policy in an environment where explicit frictions give rise to valued money, making money essential in the sense that it expands the set of feasible trades. The two main results are that the Friedman Rule is typically not optimal, and the long-run capital income tax is not zero. Neither of these results is due to any incompleteness of the tax system, as can sometimes occur in standard Ramsey analysis.

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