Three Essays on Optimal Tax and Monetary Policy Rules

This dissertation consists of three essays which are organized as chapters. On the first chapter, I compute welfare-maximizing monetary and fiscal policy feedback rules using a calibrated DSGE model with sticky prices, monopolistic competition in the intermediate goods market, and tax distortions. The exogenous government spending is considered to be productive. Therefore, the preferences of the representative household and the technology of the production function include government spending which is decomposed into public consumption and investment. The optimal policy rules under which the nominal interest rate reacts to inflation, and the tax rates responds to public debt are associated with the highest level of welfare which is surprisingly equal to richer and baseline rules. The inflation volatility is closed to zero. On the second chapter, I evaluate the impact of tax and monetary policy rules with disaggregated government purchases on welfare, real exchange rate and business cycle in a small open economy using a new-Keynesian dynamic stochastic general equilibrium frame work. The model predicts that the government consumption has more impact than government investment on both private consumption and investment, but less impact on the real GDP. Besides, the government purchases-real exchange rate puzzle is generated by the model. In this sense, the government consumption contributes more on generating the puzzle than the government investment. Moreover, both government consumption and investment have positive impact on welfare for any policy rules. The optimized policy rules have a pronounced anti-inflation stance and entail significant nominal and real exchange rate volatility for monetary policy. For tax policy rules, the public debt stance is the optimized rules. The last chapter tries to answer the following question: what are the effects of liquidity facilities (unconventional credit policy) on macroeconomic and financial variables when a small open economy faces a liquidity shock? To answer this question, we introduction the external sector with foreign private paper and bonds in a DSGE model with both nominal and real rigidities. The main result of this paper is that both unconventional credit policy has large quantitative effects on macroeconomic and financial variables. In fact, with the quantitative easing, output, consumption and investment stops to decrease after two quarters and then become positive. However, without the liquidity facilities, output, consumption and investment would have dropped continuously up to 10%, 15%, 10%, respectively. This result is closely related to DEFK 's finding in terms of sign. Besides, the domestic inflation, the objective of the conventional monetary policy, falls and becomes negative after four quarters. Then, it raises and becomes positive up to two percent (2%) after eight quarters. Furthermore, a negative liquidity shock under the quantitative easing has positive impact on employment. Nominal and real exchange rates depreciate due to a negative impact of liquidity shock. Finally, the liquidity shock has positive impact on the financial variable (domestic and foreign spreads). The domestic and foreign spreads increase up to 100 and 120 basis points, respectively