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The comeback of inflation as an optimal public finance tool

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

No 263, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We challenge the widely held belief that New-Keynesian models cannot predict optimal positive inflation rates. In fact these are justified by the Phelps argument that monetary fi nancing 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 fi scal outlays. We also contradict the view that the Ramsey policy should minimize ination 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 fi nancial crisis.

Keywords: Trend inflation; monetary and fiscal policy; Ramsey plan (search for similar items in EconPapers)
JEL-codes: E52 E58 J51 E24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2013-12, Revised 2013-12
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http://dems.unimib.it/repec/pdf/mibwpaper263.pdf First version, 2013 (application/pdf)

Related works:
Journal Article: The Comeback of Inflation as an Optimal Public Finance Tool (2015) Downloads
Working Paper: The comeback of inflation as an optimal public finance tool (2013) Downloads
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