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On the Time Inconsistency of Optimal Monetary and Fiscal Policies with Many Consumer Goods

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  • Begoña Domínguez
  • Pedro Gomis‐Porqueras

Abstract

In this paper, we study the time consistency of optimal policies in an environment where agents use cash to purchase many consumer goods and where those goods might be taxed at differential rates. Our main result is that optimal monetary and fiscal policies are, in general, time‐inconsistent, because the number of bond instruments is insufficient to influence all future fiscal decisions. However, there is one special case where optimal policies are time‐consistent, which is when differential tax rates across cash goods are optimally zero.

Suggested Citation

  • Begoña Domínguez & Pedro Gomis‐Porqueras, 2021. "On the Time Inconsistency of Optimal Monetary and Fiscal Policies with Many Consumer Goods," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(1), pages 60-83, January.
    • Handle: RePEc:bla:scandj:v:123:y:2021:i:1:p:60-83
    DOI: 10.1111/sjoe.12399
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    1. Fernando Alvarez & Patrick J. Kehoe & Pablo Andrés Neumeyer, 2004. "The Time Consistency of Optimal Monetary and Fiscal Policies," Econometrica, Econometric Society, vol. 72(2), pages 541-567, March.
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    More about this item

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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