Optimal Monetary Policy When Lump-Sum Taxes Are Unavailable: A Reconsideration of the Outcomes under Commitment and Discretion

Martin Ellison and Neil Rankin

CDMA Conference Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: We re-examine optimal monetary policy when lump-sum taxes are unavailable. Under commitment, we show that, with alternative utility functions to that considered in Nicolini’s related analysis, the direction of the incentive to cheat may depend on the initial level of government debt, with low debt creating an incentive towards surprise deflation, but high debt the reverse. Under discretion, we show that the economy will not necessarily tend to the Friedman Rule, as Obstfeld found. Instead it may tend to the critical debt level at which there is no cheating incentive under commitment, and inflation and could well be positive here.

Keywords: Time consistency; optimal inflation-tax smoothing; discretion; commitment; Friedman Rule. (search for similar items in EconPapers)
JEL-codes: E52 E61 (search for similar items in EconPapers)
Date: 2005-08
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (9)

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Journal Article: Optimal monetary policy when lump-sum taxes are unavailable: A reconsideration of the outcomes under commitment and discretion (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:san:cdmacp:0501

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