Time Consistency of Fiscal and Monetary Policy: A Solution
2005 (English)Report (Other academic)
This paper demonstrates how time consistency of the Ramsey policy – the optimal fiscal and monetary policy under commitment – can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite a general Ramsey policy, including timevarying policies with positive inflation and positive nominal interest rates. We compare our resuklts with those in Persson, Persson, and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe, and Neumeyer (2004).
Place, publisher, year, edition, pages
Stockholm: IIES , 2005. , 26 p.
Seminar Paper / Institute for International Economic Studies, Stockholm University. (Online), ISSN 1653-610X ; 734
time consistency, Ramsey policy, surprise inflation
IdentifiersURN: urn:nbn:se:su:diva-42213OAI: oai:DiVA.org:su-42213DiVA: diva2:344388