Optimal inflation persistence: Ramsey taxation with capital and habits

Sanjay Chugh

No 829, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Ramsey models of fiscal and monetary policy with perfectly-competitive product markets and a fixed supply of capital predict highly volatile inflation with no serial correlation. In this paper, we show that an otherwise-standard Ramsey model that incorporates capital accumulation and habit persistence predicts highly persistent inflation. The result depends on increases in either the ability to smooth consumption or the preference for doing so. The effect operates through the Fisher relationship: a smoother profile of consumption implies a more persistent real interest rate, which in turn implies persistent optimal inflation. Our work complements a recent strand of the Ramsey literature based on models with nominal rigidities. In these models, inflation volatility is lower but continues to exhibit very little persistence. We quantify the effects of habit and capital on inflation persistence and also relate our findings to recent work on optimal fiscal policy with incomplete markets.

Keywords: Inflation (Finance); Econometric models; Monetary policy (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.federalreserve.gov/pubs/ifdp/2005/829/default.htm (text/html)
http://www.federalreserve.gov/pubs/ifdp/2005/829/ifdp829.pdf (application/pdf)

Related works:
Journal Article: Optimal inflation persistence: Ramsey taxation with capital and habits (2007)
Working Paper: Optimal Inflation Persistence: Ramsey Taxation with Capital and Habits (2005)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:829

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().