Essays in dynamic fiscal and monetary policy

This thesis contributes to theoretical and quantitative understanding of fiscal and monetary policy in dynamic environments.; In the first essay we study optimal tax policy in a dynamic private information economy. We show that under a standard assumption of full observability of trades by agents the competitive equilibrium is efficient. We go on to consider an environment with unobservable trades in competitive markets. We show that efficient allocations have the property that the marginal product of capital is different from the market interest rate associated with unobservable trades. Taxation of capital income can be welfare-improving because such taxation introduces a wedge between market interest rates and the marginal product of capital and allows agents to obtain better insurance in private markets.; The second essay describes how to optimally design a disability insurance system. The key friction in the model is imperfectly observable disability. We solve a dynamic mechanism design problem and provide a theoretical and numerical characterization of the social optimum. We then propose a simple tax system that implements an optimal allocation as a competitive equilibrium and includes only taxes and transfers that are similar to those already present in the U.S. tax code: a savings tax and an asset-tested transfer program.; The third essay develops a model of entrepreneurial choice in which some individuals have a comparative advantage in starting new business enterprises. Efficiency dictates that entrepreneurs should specialize in start-ups and sell successful start-ups to professional managers. We consider the role of capital gains taxation. With taxation of capital gains, some of the entrepreneurs get inefficiently locked into running their own enterprises. We quantify the role of this effect and argue that it is large.; The fourth essay develops a model of a monetary economy in which individual firms are subject to idiosyncratic productivity shocks as well as general inflation. Sellers can change price only by incurring a real menu cost. We calibrate this model using U.S. data set of individual prices and use it to conduct numerical experiments. In none of the simulations we conducted did monetary shocks induce large or persistent real responses.