Heterogeneity between unemployed and employed individuals matters for optimal fiscal policy. This paper considers the consequences of such heterogeneity for the determination of optimal capital and income taxes in a model with matching frictions in the labor market. In line with a recent finding...

We determine the optimal degree of price inflation volatility when nominal wages are sticky and the government uses state-contingent inflation to finance government spending. We address this question in a well-understood Ramsey model of fiscal and monetary policy, in which the benevolent planner...