Journal Article

Optimal Fiscal and Monetary Policy in Customer Markets

Journal of Money, Credit and Banking

This paper presents a model in which some goods trade in \customer markets." In these

markets, advertising plays a critical role in facilitating long-lived relationships. We estimate both policy and non-policy parameters of the model (which includes New-Keynesian frictions) on U.S. data, including advertising expenditures. The estimated parameters imply a large congestion externality in the pricing of customer market goods. This pricing ineciency motivates the analysis of optimal policy. When the planner has access to a complete set of taxes and chooses them optimally, scal policy eliminates the externalities with large adjustments in the tax rates that operate directly in customer markets; labor tax volatility remains low. If available policy instruments are constrained to the interest rate and labor tax, then the latter displays large and procyclical uctuations, while the implications for monetary policy are largely unchanged from the model with no customer markets.

Authors

David M. Arseneau
Ryan Chahrour
Sanjay K. Chugh
Alan Finkelstein Shapiro

Info

Publication Date
JEL Classification
E30, E50, E61, E63