Time Consistency of Fiscal and Monetary Policy: A Solution

Mats Persson, Torsten Persson () and Lars Svensson

No 11088, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper demonstrates how time consistency of the Ramsey policy - the optimal fiscal and monetary policy under commitment - can be achieved. Each government should leave its successor with a unique maturity structure for the nominal and indexed debt, such that the marginal benefit of a surprise inflation exactly balances the marginal cost. Unlike in earlier papers on the topic, the result holds for quite a general Ramsey policy, including timevarying polices with positive inflation and positive nominal interest rates. We compare our results with those in Persson, Persson, and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe, and Neumeyer (2004).

JEL-codes: E31 E52 H21 (search for similar items in EconPapers)
Date: 2005-01
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-pbe
Note: EFG IFM ME
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Citations: View citations in EconPapers (4)

Published as Mats Persson & Torsten Persson & Lars E. O. Svensson, 2006. "Time Consistency of Fiscal and Monetary Policy: A Solution," Econometrica, Econometric Society, vol. 74(1), pages 193-212, 01.

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Journal Article: Time Consistency of Fiscal and Monetary Policy: A Solution (2006)
Working Paper: Time Consistency of Fiscal and Monetary Policy: A Solution (2005)
Working Paper: Time Consistency of Fiscal and Monetary Policy: A Solution (2005)
Working Paper: Time Consistency of Fiscal and Monetary Policy: A Solution (2004)
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