Working Paper: CEPR ID: DP2664
Authors: Neil Rankin
Abstract: We re-examine optimal monetary policy in a dynamic general equilibrium model where open market operations are the only policy instrument. The government optimizes purely over private agents? welfare. We use a money-in-the-utility-function approach with a welfare cost of ?current? inflation. Under commitment, for the most plausible specification time inconsistency takes the form of surprise inflation, if there is high initial government debt. Although ?orthodox?, this result contradicts Nicolini?s related analysis, in which surprise deflation is the main finding. Under discretion, we find that the long-run inflation rate is quite likely to be positive, not negative as in Obstfeld?s related analysis.
Keywords: inflation bias; monetary policy; open market operations; optimal seigniorage; time consistency
JEL Codes: E52; E61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high initial government debt (H63) | surprise inflation (E31) |
| low initial government debt (H63) | surprise deflation (E31) |
| high initial government debt (H63) | inflation bias (E31) |
| initial government debt (H63) | time inconsistency (D15) |
| initial government debt (H63) | inflation expectations (E31) |