Inflationary Finance under Discrepion and Rules
AbstractInflationary finance involves first, the tax on cash balances from expected inflation, and second, a capital levy from unexpected inflation. From the standpoint of minimizing distortions, these capital levies are attractive, ex post, to the policymaker. In a full equilibrium two conditions hold: 1) the monetary authority optimizes subject to people's expectations mechanisms, and 2) people form expectations rationally, given their knowledge of the policymaker's objectives. The outcomes under discretionary policy are contrasted with those generated under rules. In a purely discretionary regime the monetary authority can make no meaningful commitments about the future behavior of money and prices. Under an enforced rule, it becomes possible to make some guarantees. Hence, the links between monetary actions and inflationary expectations can be internalized. There is a distinction between fully-contingent rules and rules of simple form. A simple rule allows the internalization of some connections between policy act ion and inflationary expectations, but discretion permits some desirable flexibility of monetary growth.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0889.
Date of creation: May 1982
Date of revision:
Publication status: published as Barro, Robert J. "Inflationary Finance under Discretion and Rules." Canadian Journal of Economics, Vol. 16, No. 1, (February 1983), pp. 1-16.
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Other versions of this item:
- Robert J. Barro, 1983. "Inflationary Finance under Discretion and Rules," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 16(1), pages 1-16, February.
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- Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
- Auernheimer, Leonardo, 1974. "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 82(3), pages 598-606, May/June.
- Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, American Economic Association, vol. 63(3), pages 326-34, June.
- Barro, Robert J., 1976. "Rational expectations and the role of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 2(1), pages 1-32, January.
- Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 45(6), pages 1377-85, September.
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