Working Paper: CEPR ID: DP4941
Authors: Torsten Persson; Mats Persson; Lars E. O. Svensson
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 general Ramsey policies, including time-varying 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).
Keywords: Ramsey policy; Surprise inflation; Time consistency
JEL Codes: E31; E52; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| restructuring of nominal and indexed debt (F34) | time consistency of the Ramsey policy (E61) |
| time consistency of the Ramsey policy (E61) | incentives for surprise inflation (E31) |
| government debt structure (H63) | inflation expectations (E31) |
| inflation expectations (E31) | economic distortions (H31) |
| government debt structure (H63) | economic distortions (H31) |