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The comeback of inflation as an optimal public finance tool

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  • Giovanni Di Bartolomeo
  • Patrizio Tirelli
  • Nicola Acocella

Abstract

We challenge the widely held belief that New-Keynesian models cannot predict optimal positive in�flation rates. In fact these are justi�fied by the Phelps argument that monetary fi�nancing can alleviate the burden of distortionary taxation. We obtain this result because, in contrast with previous contributions, our model accounts for public transfers as a component of fi�scal outlays. We also contradict the view that the Ramsey policy should minimize in�ation volatility and induce near-random walk dynamics of public debt in the long-run. In our model it should instead stabilize debt-to-GDP ratios in order to mitigate steady-state distortions. Our results thus provide theoretical support to policy-oriented analyses which call for a reversal of debt accumulated in the aftermath of the 2008 fi�nancial crisis.

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Bibliographic Info

Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 263.

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Length: 22
Date of creation: Dec 2013
Date of revision: Dec 2013
Handle: RePEc:mib:wpaper:263

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Keywords: Trend infl�ation; monetary and fi�scal policy; Ramsey plan;

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  1. Sbordone, Argia, 1998. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Seminar Papers 653, Stockholm University, Institute for International Economic Studies.
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