Time Consistency of Fiscal and Monetary Policy: A Solution

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 nominal and indexed debt, such that the marginal benefit of a surprise inflation...

Full description

Saved in:
Bibliographic Details
Published in:Econometrica 2006-01, Vol.74 (1), p.193-212
Main Authors: Persson, Mats, Persson, Torsten, Svensson, Lars E. O.
Format: Article
Language:English
Subjects:
Applications
Budget constraints
Debt
Economic policy
Economic theory
Exact sciences and technology
Financial liabilities
Fiscal policy
Inflation
Insurance, economics, finance
Interest rates
Mathematical methods
Mathematics
Monetary models
Monetary policy
Monetary theory
Optimal taxation
Policy analysis
Price levels
Probability and statistics
Ramsey policy
Sciences and techniques of general use
Statistics
Studies
surprise inflation
Time consistency
Utility functions
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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 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 general Ramsey policies, including time-varying polices with positive inflation and positive nominal interest rates. We compare our results with those in Persson, Persson, and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe, and Neumeyer (2004).
ISSN:0012-9682
1468-0262
DOI:10.1111/j.1468-0262.2006.00653.x