Optimal Inflation Persistence: Ramsey Taxation with Capital and Habits

Sanjay Chugh

No 369, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: Ramsey models of fiscal and monetary policy with perfectly-competitive product markets and a fixed supply of capital predict highly volatile inflation with no serial correlation. In this paper, we show that an otherwise-standard Ramsey model that incorporates capital accumulation and habit persistence predicts highly persistent inflation. The result depends on increases in either the ability to smooth consumption or the preference for doing so. The effect operates through the Fisher relationship: a smoother profile of consumption implies a more persistent real interest rate, which in turn implies persistent optimal inflation. Our work complements a recent strand of the Ramsey literature based on models with nominal rigidities. In these models, inflation volatility is lower but continues to exhibit very little persistence. We quantify the effects of habit and capital on inflation persistence and also relate our findings to recent work on optimal fiscal policy with incomplete markets

Keywords: Optimal fiscal and monetary policy; inflation persistence; Ramsey model; habit formation (search for similar items in EconPapers)
JEL-codes: E50 E61 E63 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Optimal inflation persistence: Ramsey taxation with capital and habits (2007)
Working Paper: Optimal inflation persistence: Ramsey taxation with capital and habits (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf5:369

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