A theory of low inflation in a non Ricardian economy with credit constraints
AbstractThis paper explores the relationship between the severity of credit constraints and long run inflation in a simple non Ricardian setting. It is shown that a low positive inflation can loosen credit constraints and that this effect yields a theory of the optimal long run inflation target with no assumption concerning nominal rigidities or expectation errors. Credit constraints introduce an un-priced negative effect of the real interest rate on investment. Because of this effect, the standard characterization of economic efficiency with the Golden Rule fails to apply. When fiscal policy is optimally designed, the first best allocation can be achieved thanks to a positive inflation rate and a proportional tax on consumption.
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Date of creation: Jun 2005
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credit constraints ; long run inflation ; non Ricardian setting;
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- Weiss, Laurence M, 1980. "The Effects of Money Supply on Economic Welfare in the Steady State," Econometrica, Econometric Society, vol. 48(3), pages 565-76, April.
- Jean-Pascal Benassy, 2003. "Fiscal Policy and Optimal Monetary Rules in a non Ricardian Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 498-512, July.
- Gaetano Antinolfi & Costas Azariadis & James B. Bullard, 2007.
"The optimal inflation target in an economy with limited enforcement,"
2007-037, Federal Reserve Bank of St. Louis.
- James Bullard & Gaetano Antinolfi & Costas Azariadis, 2008. "The optimal inflation target in an economy with limited enforcement," Speech 166, Federal Reserve Bank of St. Louis.
- Gaetano Antinolfi & Costas Azariadis & James Bullard, 2012. "The optimal inflation target in an economy with limited enforcement," Working Papers 2012-044, Federal Reserve Bank of St. Louis.
- James Bullard & Costas Azariadis & Gaetano Antinolfi, 2008. "The Optimal Inflation Target in an Economy with Limited Enforcement," 2008 Meeting Papers 915, Society for Economic Dynamics.
- James Bullard & Gaetano Antinolfi & Costas Azariadis, 2008. "The optimal inflation target in an economy with limited enforcement," Speech 167, Federal Reserve Bank of St. Louis.
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