We show that optimal monetary and fiscal policies are time consistent for a class of economies often used in applied work, economies appealing because they are consistent with the growth facts. We establish our results in two steps. We first show that for this class of economies, the Friedman rule of setting nominal interest rates to zero is optimal under commitment. We then show that optimal policies are time consistent if the Friedman rule is optimal. For our benchmark economy in which the time consistency problem is most severe, the converse also holds: if optimal policies are time consistent, then the Friedman rule is optimal.
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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number
305.
Length: Date of creation: 2003 Date of revision: Publication status: Published in Econometrica (Vol. 72, No. 2, March 2004, pp. 541-567) Handle: RePEc:fip:fedmsr:305
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Chari, V V & Kehoe, Patrick J, 1990.
"Sustainable Plans,"
Journal of Political Economy,
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[Downloadable!] (restricted)
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V.V. Chari & Patrick J. Kehoe, 1989.
"Sustainable plans,"
Staff Report
122, Federal Reserve Bank of Minneapolis.
[Downloadable!]
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)
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