Optimal and Time-Consistent Monetary and Fiscal Policy with Heterogeneous Agents

Stefania Albanesi

No 3713, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper studies the structure and time consistency of optimal monetary policy from a public finance perspective in an economy where agents differ in transaction patterns and asset holdings. I find that heterogeneity breaks the link between lack of government commitment and high inflation, which characterizes representative agent models of optimal fiscal and monetary policy. Even under commitment, it may be optimal to depart from Friedman?s rule for setting nominal interest rates. Moreover, optimal monetary and fiscal policies are time consistent. Time consistency does not require outstanding nominal claims on the government to be zero.

Keywords: inflation; Redistribution; Heterogeneity; Time consistency (search for similar items in EconPapers)
JEL-codes: E40 E50 E60 (search for similar items in EconPapers)
Date: 2003-01
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (10)

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