IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/11088.html
   My bibliography  Save this paper

Time Consistency of Fiscal and Monetary Policy: A Solution

Author

Listed:
  • Mats Persson
  • Torsten Persson
  • Lars E.O. Svensson

Abstract

This paper demonstrates how time consistency of the Ramsey policy - the optimal fiscal and monetary policy under commitment - can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite a general Ramsey policy, including timevarying polices with positive inflation and positive nominal interest rates. We compare our results with those in Persson, Persson, and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe, and Neumeyer (2004).

Suggested Citation

  • Mats Persson & Torsten Persson & Lars E.O. Svensson, 2005. "Time Consistency of Fiscal and Monetary Policy: A Solution," NBER Working Papers 11088, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11088
    Note: EFG IFM ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w11088.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Persson, Mats & Persson, Torsten & Svensson, Lars E O, 1987. "Time Consistency of Fiscal and Monetary Policy," Econometrica, Econometric Society, vol. 55(6), pages 1419-1431, November.
    2. Fernando Alvarez & Patrick J. Kehoe & Pablo Andrés Neumeyer, 2002. "The time consistency of monetary and fiscal policies," Working Papers 616, Federal Reserve Bank of Minneapolis.
    3. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, vol. 46(6), pages 1411-1428, November.
    4. Danthine, Jean-Pierre & Donaldson, John B, 1986. "Inflation and Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 54(3), pages 585-605, May.
    5. 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.
    6. Mats Persson & Torsten Persson & Lars E. O. Svensson, 1998. "Debt, Cash Flow and Inflation Incentives: A Swedish Example," International Economic Association Series, in: Guillermo Calvo & Mervyn King (ed.), The Debt Burden and its Consequences for Monetary Policy, chapter 2, pages 28-66, Palgrave Macmillan.
    7. Guillermo Calvo & Mervyn King (ed.), 1998. "The Debt Burden and its Consequences for Monetary Policy," International Economic Association Series, Palgrave Macmillan, number 978-1-349-26077-5, December.
    8. Pedro Teles, 2003. "The optimal price of money," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 27(Q II), pages 29-39.
    9. Calvo, Guillermo A & Obstfeld, Maurice, 1990. "Time Consistency of Fiscal and Monetary Policy: A Comment," Econometrica, Econometric Society, vol. 58(5), pages 1245-1247, September.
    10. Deaton, Angus, 1981. "Optimal Taxes and the Structure of Preferences," Econometrica, Econometric Society, vol. 49(5), pages 1245-1260, September.
    11. Mats Persson & Torsten Persson & Lars E. O. Svensson, 2006. "Time Consistency of Fiscal and Monetary Policy: A Solution," Econometrica, Econometric Society, vol. 74(1), pages 193-212, January.
    12. Nicolini, Juan Pablo, 1998. "More on the time consistency of monetary policy," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 333-350, April.
    13. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
    14. 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 919-944, October.
    15. Persson, Torsten & Svensson, Lars E. O., 1984. "Time-consistent fiscal policy and government cash-flow," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 365-374, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Liu, X, 2010. "Is Optimal Monetary and Fiscal Policy in a Small Open Economy Time Consistent?," MPRA Paper 28781, University Library of Munich, Germany.
    2. Liu, Xuan, 2013. "Time consistency of optimal monetary and fiscal policy in a small open economy," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 47-67.
    3. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482, Elsevier.
    4. Cunha, Alexandre B., 2005. "A Direct Proof of the First Welfare Theorem," Insper Working Papers wpe_30, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    5. 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.
    6. Alexandre B. Cunha, 2006. "Implications of the Modigliani-Miller Theorem for the Study of Exchange Rate Regimes," IBMEC RJ Economics Discussion Papers 2006-03, Economics Research Group, IBMEC Business School - Rio de Janeiro.
    7. Leeper, E.M. & Leith, C., 2016. "Understanding Inflation as a Joint Monetary–Fiscal Phenomenon," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2305-2415, Elsevier.
    8. Benhabib, Jess & Velasco, Andres, 1996. "On the optimal and best sustainable taxes in an open economy," European Economic Review, Elsevier, vol. 40(1), pages 135-154, January.
    9. Maurice Obstfeld, 1989. "Dynamic Seigniorage Theory: An Exploration," NBER Working Papers 2869, National Bureau of Economic Research, Inc.
    10. Barthélemy, Jean & Mengus, Eric & Plantin, Guillaume, 2024. "The central bank, the treasury, or the market: Which one determines the price level?," Journal of Economic Theory, Elsevier, vol. 220(C).
    11. Alexandre Cunha, 2008. "The optimality of the Friedman rule when some distorting taxes are exogenous," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(2), pages 267-291, May.
    12. Javier Diaz-Gimenez & Giorgia Giovannetti & Ramon Marimon & Pedro Teles, 2008. "Nominal Debt as a Burden on Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 493-514, July.
    13. Marimon, Ramon & Nicolini, Juan Pablo & Teles, Pedro, 2003. "Inside-outside money competition," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1701-1718, November.
    14. Westerhout, Ed & Beetsma, Roel, 2019. "A comparison of nominal and indexed debt under fiscal constraints," Journal of International Money and Finance, Elsevier, vol. 91(C), pages 177-194.
    15. Canzoneri, Matthew & Cumby, Robert & Diba, Behzad, 2010. "The Interaction Between Monetary and Fiscal Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 17, pages 935-999, Elsevier.
    16. Cooke, Dudley, 2006. "Openness and Inflation," Economics Discussion Papers 8907, University of Essex, Department of Economics.
    17. P Arestis & A Mihailov, 2009. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Issues Journal Articles, Economic Issues, vol. 14(2), pages 27-54, September.
    18. Alexandre Cunha, 2013. "On the relevance of floating exchange rate policies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(2), pages 357-382, June.
    19. Stefania Albanesi, "undated". "The Time Consistency of Optimal Monetary Policy with Heterogeneous Agents," Working Papers 207, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    20. Pintér, Gábor, 2022. "The procyclicality of inflation-linked debt," Economics Letters, Elsevier, vol. 218(C).

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11088. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.