OPTIMAL MONETARY AND FISCAL POLICIES UNDER WAGE AND PRICE RIGIDITIES

Abstract

We study a structural dynamic monetary economy submitted to technological, monetary, and real demand shocks, and investigate the nature of optimal monetary and fiscal policies under Walrasian or preset wages and prices. If prices and wages are Walrasian, then the optimal policies are both nonactivist and derive directly from Milton Friedman s prescriptions. If prices or wages are preset, however, optimal policies, and, notably, the fiscal part, become activist and countercyclical.