Optimal Monetary Policy, Taxes, and Public Debt in an Intertemporal Equilibrium

Abstract

This article is devoted to a study of the optimal monetary and fiscal policies within the framework of an overlapping generations model with cash‐in‐advance constraints. We first characterize the intertemporal equilibrium. Then we show how to decentralize the optimal growth path using available policy instruments (i.e., labor income and capital taxes, public debt, money supply). Between the four instruments: wages and capital taxes, debt and monetary policy, one is redundant among the three last which implies that the Friedman Rule is only a special case.