Time Consistency of Fiscal and Monetary Policy: A Solution

Lars Svensson, Torsten Persson () and Mats Persson

No 4941, CEPR Discussion Papers from Centre for Economic Policy Research

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 general Ramsey policies, including time-varying 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).

Keywords: Time consistency; Ramsey policy; Surprise inflation (search for similar items in EconPapers)
JEL-codes: E31 E52 H21 (search for similar items in EconPapers)
Date: 2005-03
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-pbe
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Time Consistency of Fiscal and Monetary Policy: A Solution (2006)
Working Paper: Time Consistency of Fiscal and Monetary Policy: A Solution (2005)
Working Paper: Time Consistency of Fiscal and Monetary Policy: A Solution (2005)
Working Paper: Time Consistency of Fiscal and Monetary Policy: A Solution (2004)
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