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Nominal Debt as a Burden to Monetary Policy

  • Giorgia Giovannetti

    (Universita di Firenze and European University Institute)

  • Ramon Marimon

    (European University Institute)

  • Pedro Teles

    (Banco de Portugal and Universidade Catolica Portuguesa)

We study a dynamic equilibrium model where the same optimal monetary policy is implemented with and without full commitment if government debt is indexed. In contrast, with nominal debt, the full commitment policy is time inconsistent, since the government is tempted to inflate away its nominal liabilities. We characterize the optimal sequential policy. It has the feature that government debt is progressively depleted, and so, eventually, the time inconsistency problem vanishes. We compare this equilibrium to a myopic solution and to the Ramsey solution.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1387.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1387
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  1. Ellison, Martin & Rankin, Neil, 2007. "Optimal monetary policy when lump-sum taxes are unavailable: A reconsideration of the outcomes under commitment and discretion," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 219-243, January.
  2. Persson , Mats & Persson , Torsten & Svensson, Lars E.O., 2004. "Time Consistency of Fiscal and Monetary Policy: A Solution," Seminar Papers 734, Stockholm University, Institute for International Economic Studies.
  3. Javier Días-Giménez & Giorgia Giovannetti & Ramon Marimon & Pedro Teles, 2006. "Nominal Debt as a Burden on Monetary Policy," Working Papers w200606, Banco de Portugal, Economics and Research Department.
  4. Marimon, Ramon & Nicolini, Juan Pablo & Teles, Pedro, 2003. "Inside-Outside Money Competition," CEPR Discussion Papers 4039, C.E.P.R. Discussion Papers.
  5. V. V. Chari & Patrick J. Kehoe, 1999. "Optimal Fiscal and Monetary Policy," NBER Working Papers 6891, National Bureau of Economic Research, Inc.
  6. Fernando M. Martin, 2004. "A Positive Theory of Government Debt," Macroeconomics 0408013, EconWPA, revised 12 Oct 2004.
  7. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 519-39, August.
  8. Catarina Reis, 2013. "Taxation without commitment," Economic Theory, Springer, vol. 52(2), pages 565-588, March.
  9. Robert E. Lucas Jr. & Nancy L. Stokey, 1982. "Optimal Fiscal and Monetary Policy in an Economy Without Capital," Discussion Papers 532, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
  11. Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-44, October.
  12. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  13. Obstfeld, Maurice, 1997. "Dynamic Seigniorage Theory," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 588-614, September.
  14. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-61, September.
  15. Juan P. Nicolini, 1993. "More on the time inconsistency of optimal monetary policy," Economics Working Papers 56, Department of Economics and Business, Universitat Pompeu Fabra.
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