On the Time Inconsistency of Optimal Monetary and Fiscal Policies With Many Consumer Goods

Begoña Domínguez and Pedro Gomis-Porqueras

No 31-12, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper studies optimal monetary and fiscal policies in an economy à la Lucas and Stokey (1983) and Lagos and Wright (2005) with multiple cash and credit goods. We show that optimal policies are in general time inconsistent due to insufficient number of instruments to influence future government decisions. There are two important cases where time consistency can be restored. First, if taxes in the decentralized anonymous markets are not available, the multipliers on the decentralization constraints can be utilized as additional instruments to ensure time consistency. Second, if taxes in decentralized markets are available, time consistency arises when the different cash goods satisfy the conditions necessary for optimal uniform taxation.

Keywords: optimal policy; time consistency; taxation; money; inflation; search. (search for similar items in EconPapers)
JEL-codes: C70 E40 E61 E62 H21 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2012-09
New Economics Papers: this item is included in nep-dge, nep-mon and nep-pbe
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Journal Article: On the Time Inconsistency of Optimal Monetary and Fiscal Policies with Many Consumer Goods (2021)
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