RISK, OPTIMAL GOVERNMENT FINANCE AND MONETARY POLICIES IN A GROWING ECONOMY

Optimal tax and monetary policies in a stochastic monetary growth mode l are investigated. Our findings are of three general types. First, bo th capital income taxes and monetary growth are shown to influence the economy through effective risk-adjusted measures, expressed as a line ar function of their respective means and variances. Second, two stoch astic neutrality results relating to money and bonds, the two nominal assets in the economy, are identified. Third, optimal policy rules rel ating to taxes, bond finance and money creation are characterized. An essential component of optimal financial policy is a risk-adjusted bal anced budget.