Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions

Jean-Bernard Chatelain and Kirsten Ralf

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Abstract: We consider a frictionless constant endowment economy based on Leeper (1991). In this economy, it is shown that, under an ad-hoc monetary rule and an ad-hoc fiscal rule, there are two equilibria. One has active monetary policy and passive fiscal policy, while the other has passive monetary policy and active fiscal policy. We consider an extended setup in which the policy maker minimizes a loss function under quasi-commitment, as in Schaumburg and Tambalotti (2007). Under this formulation there exists a unique Ramsey equilibrium, with an interest rate peg and a passive fiscal policy. We thank John P. Conley, Luis de Araujo and one referree for their very helpful comments.

Keywords: Interest Rate Rule; Frictionless endowment economy; Fiscal theory of the Price Level; Ramsey optimal policy; Fiscal Rule (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Note: View the original document on HAL open archive server: https://hal.science/hal-02471593v1
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Citations: View citations in EconPapers (12)

Published in Economics Bulletin, 2020

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Related works:
Journal Article: Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions (2020)
Working Paper: Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions (2020)
Working Paper: Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions (2020)
Working Paper: Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions (2020)
Working Paper: Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions (2020)
Working Paper: Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions (2020)
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