The comeback of inflation as an optimal public finance tool
Giovanni Di Bartolomeo (),
Nicola Acocella and
Patrizio Tirelli ()
wp.comunite from Department of Communication, University of Teramo
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 financing 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 fiscal outlays. We also contradict the view that the Ramsey policy should minimize inflation 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 financial 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-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Journal Article: The Comeback of Inflation as an Optimal Public Finance Tool (2015)
Working Paper: The comeback of inflation as an optimal public finance tool (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ter:wpaper:0100
Access Statistics for this paper
More papers in wp.comunite from Department of Communication, University of Teramo
Bibliographic data for series maintained by Giovanni Di Bartolomeo ().