Date of Original Version




Published In

Journal of Monetary Economics Volume 55, Issue 4, May 2008, Pages 710-727

Abstract or Table of Contents

We analyze optimal fiscal and monetary policy in an economy with distortionary labor income taxes, nominal rigidities, nominal debt of various maturities and short-selling constraints. Optimal policy prescribes the almost exclusive use of long term debt. Such debt mitigates the distortions associated with hedging fiscal shocks by allowing the government to allocate them efficiently across states and periods.