A theory of low inflation in a non Ricardian economy with credit constraints

Xavier Ragot

PSE Working Papers from HAL

Abstract: This paper explores the relationship between the severity of credit constraints and long run inflation in a simple non Ricardian setting. It is shown that a low positive inflation can loosen credit constraints and that this effect yields a theory of the optimal long run inflation target with no assumption concerning nominal rigidities or expectation errors. Credit constraints introduce an un-priced negative effect of the real interest rate on investment. Because of this effect, the standard characterization of economic efficiency with the Golden Rule fails to apply. When fiscal policy is optimally designed, the first best allocation can be achieved thanks to a positive inflation rate and a proportional tax on consumption.

Keywords: credit constraints; long run inflation; non Ricardian setting (search for similar items in EconPapers)
Date: 2005-06
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00590788v1
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Working Paper: A theory of low inflation in a non Ricardian economy with credit constraints (2005)
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