Lustig, Hanno; Sleet, Christopher; Yeltekin, Sevin - In: Journal of Monetary Economics 55 (2008) 4, pp. 710-727
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...