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The Comeback of Inflation as an Optimal Public Finance Tool

Giovanni Di Bartolomeo (), Patrizio Tirelli () and Nicola Acocella

International Journal of Central Banking, 2015, vol. 11, issue 1, 43-70

Abstract: We challenge the widely held belief that New Keynesian models cannot predict optimal positive inflation rates. In fact, interest rates are justified by the Phelps argument that monetary financing can alleviate the burden of distortionary taxation. We obtain this result because, in contrast with previous contributions, our model accounts for public transfers as a component of fiscal outlays. We also contradict the view that the Ramsey policy should minimize inflation volatility and induce near-random-walk dynamics of public debt in the long run. In our model it should instead stabilize debt-to-GDP ratios in order to mitigate steady-state distortions. Our results thus provide theoretical support to policy-oriented analyses which call for a reversal of debt accumulated in the aftermath of the 2008 financial crisis.

JEL-codes: E52 E58 J51 E24 (search for similar items in EconPapers)
Date: 2015
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Working Paper: The comeback of inflation as an optimal public finance tool (2013) Downloads
Working Paper: The comeback of inflation as an optimal public finance tool (2013) Downloads
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