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Does The Timing Of The Cash-In-Advance Constraint Matter For Optimal Fiscal And Monetary Policy?

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  • Chugh, Sanjay K.

Abstract

I demonstrate that the precise timing of financial markets and goods markets in a simple cash good/credit good model does not matter for the main results in the Ramsey literature on optimal fiscal and monetary policy. In Ramsey models based on Lucas and Stokey [Journal of Monetary Economics 12, 55–93 (1983)] and Chari, Christiano, and Kehoe [Journal of Money, Credit, and Banking 23, 519–539 (1991)], nominal money holdings are freely adjustable in response to shocks in the period in which they will be used to purchase consumption. In contrast, under Svensson [Journal of Political Economy 93, 919–944 (1985)] timing, nominal balances cannot be adjusted in the period they will be used. The broad finding is that benchmark Ramsey results are not very sensitive to this slight, ultimately ad hoc, modification. In particular, optimal inflation continues to display very high variability just as in the original models, although this can differ depending on exactly which exogenous processes are driving the economy. That the basic results in the Ramsey literature are not sensitive to the choice of cash/credit timing is reassuring as Ramsey analysis is applied to an ever-expanding set of model environments.

Suggested Citation

  • Chugh, Sanjay K., 2009. "Does The Timing Of The Cash-In-Advance Constraint Matter For Optimal Fiscal And Monetary Policy?," Macroeconomic Dynamics, Cambridge University Press, vol. 13(S1), pages 133-150, May.
    • Handle: RePEc:cup:macdyn:v:13:y:2009:i:s1:p:133-150_08
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    Cited by:

    1. Anthony Diercks, 2016. "The Equity Premium, Long-Run Risk, and Optimal Monetary Policy," 2016 Meeting Papers 207, Society for Economic Dynamics.
    2. Du, Houyang & Guo, Ye & Liu, Xuan, 2018. "How does the timing of markets affect optimal monetary and fiscal policy in sticky price models?," Economic Modelling, Elsevier, vol. 72(C), pages 237-248.
    3. Zhiming Fu & Antoine Le Riche, 2021. "Progressive consumption tax and monetary policy in an endogenous growth model," Journal of Economics, Springer, vol. 133(3), pages 271-293, August.
    4. David M. Arseneau & Ryan Chahrour & Sanjay K. Chugh & Alan Finkelstein Shapiro, 2015. "Optimal Fiscal and Monetary Policy in Customer Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(4), pages 617-672, June.
    5. Talukdar Bidyut, 2014. "Organizational learning and optimal fiscal and monetary policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-31, January.
    6. Anthony M. Diercks, 2015. "The Equity Premium, Long-Run Risk, & Optimal Monetary Policy," Finance and Economics Discussion Series 2015-87, Board of Governors of the Federal Reserve System (U.S.).
    7. Pei, Yun & Xie, Zoe, 2022. "Timing and time inconsistency in search models," Economics Letters, Elsevier, vol. 220(C).
    8. Maio, Paulo & Silva, André C., 2020. "Asset pricing implications of money: New evidence," Journal of Banking & Finance, Elsevier, vol. 120(C).

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