Inflation's Role in Optimal Monetary-Fiscal Policy

Eric Leeper and Xuan Zhou

No 19686, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study how the maturity structure of nominal government debt affects optimal monetary and fiscal policy decisions and equilibrium outcomes in the presence of distortionary taxes and sticky prices. Key findings are: (1) there is always a role for current and future inflation innovations to revalue government debt, reducing reliance on distorting taxes; (2) the role of inflation in optimal fiscal financing increases with the average maturity of government debt; (3) as average maturity rises, it is optimal to tradeoff inflation for output stabilization; (4) inflation is relatively more important as a fiscal shock absorber in high-debt than in low-debt economies; (5) in some calibrations that are relevant to U.S. data, welfare under the fully optimal monetary and fiscal policies can be made equivalent to the welfare under the conventional optimal monetary policy with passively adjusting lump-sum taxes by extending the average maturity of bond.

JEL-codes: E31 E52 E62 E63 (search for similar items in EconPapers)
Date: 2013-11
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Published as Eric M. Leeper & Xuan Zhou, 2021. "Inflation’s Role in Optimal Monetary-Fiscal Policy," Journal of Monetary Economics, .

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