On the Flexibility of Monetary Policy: The Case of the Optimal Inflation Tax

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On the Flexibility of Monetary Policy: The Case of the Optimal Inflation Tax

Author Info

Calvo, Guillermo A
Guidotti, Pablo E

Abstract

This paper examines optimal monetary policy under uncertainty in a context in which policymakers are able to make credible policy commitments. The authors study an optimal taxation problem of minimizing the social cost of financing a stochastic and exogenous level of government transfers. Since, in the basic model, the welfare costs of inflation derive only from expected inflation, the optimal monetary policy is highly responsive to the state of nature. In a benchmark case in which all shocks are transitory, the optimal policy calls for loading all the variability of government transfers on the shoulders of the inflation tax. Copyright 1993 by The Review of Economic Studies Limited.

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Article provided by Blackwell Publishing in its journal Review of Economic Studies.

Volume (Year): 60 (1993)
Issue (Month): 3 (July)
Pages: 667-87
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Handle: RePEc:bla:restud:v:60:y:1993:i:3:p:667-87

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Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany. [Downloadable!]
Other versions:
- Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
- Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May. [Downloadable!] (restricted)
Cristina Arellano & Jonathan Heathcote, 2007. "Dollarization and financial integration," Staff Report 385, Federal Reserve Bank of Minneapolis. [Downloadable!]
Other versions:
- Jonathan Heathcote & Cristina Arellano, 2004. "Dollarization and Financial Integration," 2004 Meeting Papers 10, Society for Economic Dynamics.
- Cristina Arellano & Jonathan Heathcote, 2007. "Dollarization and financial integration," International Finance Discussion Papers 890, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
- Arellano, Cristina & Heathcote, Jonathan, 2007. "Dollarization and Financial Integration," CEPR Discussion Papers 6116, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Stephanie Schmitt-Grohé & Martín Uribe, 2008. "Policy implications of the new Keynesian Phillips curve," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 435-465. [Downloadable!]
Sanjay Chugh, 2005. "Optimal inflation persistence: Ramsey taxation with capital and habits," International Finance Discussion Papers 829, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Ernesto Talvi & Carlos A. Vegh, 2000. "Tax Base Variability and Procyclical Fiscal Policy," NBER Working Papers 7499, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Bottazzi, Laura & Manasse, Paolo, 2002. "Asymmetric Information and Monetary Policy in Common Currency Areas," CEPR Discussion Papers 3484, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- L. Bottazzi & P. Manasse, 2002. "Asymmetric Information and Monetary Policy in Common Currency Areas," Working Papers 444, Dipartimento Scienze Economiche, Universita' di Bologna. [Downloadable!]
- Laura Bottazzi & Paolo Manasse, . "Asymmetric Information and Monetary Policy in Common Currency Areas," Working Papers 217, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
- Bottazzi, Laura & Manasse, Paolo, 2005. "Asymmetric Information and Monetary Policy in Common Currency Areas," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(4), pages 603-21, August.
Janvier Nkurunziza, 2004. "How Long Can Inflation Tax Compensate For The Loss Of Government Revenue In War Economies? Evidence From Burundi," Development and Comp Systems 0409065, EconWPA. [Downloadable!]
Isabel Correia & Pedro Teles, 1997. "The optimal inflation tax," Discussion Paper / Institute for Empirical Macroeconomics 123, Federal Reserve Bank of Minneapolis. [Downloadable!]
Other versions:
- Isabel Correia & Pedro Teles, 1999. "The Optimal Inflation Tax," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(2), pages 325-346, April. [Downloadable!] (restricted)
Yifan Hu & Timothy Kam, 2005. "Ramsey Fiscal And Monetary Policy Under Sticky Prices And Liquid Bonds," CAMA Working Papers 2005-26, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
Joshua Aizenman, Michael Gavin, Ricardo Hausmann, 2000. "Optimal tax and debt policy with endogenously imperfect creditworthiness," Journal of International Trade & Economic Development, Taylor and Francis Journals, vol. 9(4), pages 367-395, December. [Downloadable!] (restricted)
Other versions:
- Joshua Aizenman & Michael Gavin & Ricardo Hausmann, 1996. "Optimal Tax and Debt Policy with Endogenously Imperfect Creditworthiness," NBER Working Papers 5558, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Yifan Hu & Timothy Kam, 2006. "Ramsey Fiscal And Monetary Policy Under Sticky Prices And Liquid Bonds," ANUCBE School of Economics Working Papers 2006-472, Australian National University, College of Business and Economics, School of Economics. [Downloadable!]
Sanjay K. Chugh, 2005. "Optimal Inflation Persistence: Ramsey Taxation with Capital and Habits," Computing in Economics and Finance 2005 369, Society for Computational Economics. [Downloadable!]
Roberto Chang & Andres Velasco, 2002. "Dollarization: Analytical Issues," NBER Working Papers 8838, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Optimal fiscal and monetary policy in a medium-scale macroeconomic model," Working Paper Series 612, European Central Bank. [Downloadable!]
Laura Alfaro & Fabio Kanczuk, 2007. "Nominal versus Indexed Debt: A Quantitative Horse Race," NBER Working Papers 13131, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Reinhart, Carmen, 2001. "Fear of Floating: Exchange Rate Flexibility Indices," MPRA Paper 13196, University Library of Munich, Germany. [Downloadable!]

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