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The time consistency of monetary and fiscal policies

Fernando Alvarez, Patrick Kehoe () and Pablo Neumeyer

No 616, Working Papers from Federal Reserve Bank of Minneapolis

Abstract: Are optimal monetary and fiscal policies time consistent in a monetary economy? Yes, but if and only if under commitment the Friedman rule of setting nominal interest rates to zero is optimal. This result is of applied interest because the Friedman rule is optimal for the standard preferences used in applied work, those consistent with the growth facts. (Replaced by Staff Report No: 305)

Keywords: Monetary policy; Interest rates; Fiscal policy (search for similar items in EconPapers)
Date: 2002, Revised 2002
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