Working Paper: NBER ID: w11088
Authors: Mats Persson; Torsten 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 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).
Keywords: Time Consistency; Fiscal Policy; Monetary Policy; Ramsey Policy; Debt Structure
JEL Codes: E310; E520; H210
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Debt structure (G32) | Time consistency of fiscal and monetary policy (E61) |
| Restructuring of nominal and indexed debt (F34) | Elimination of incentives for surprise inflation (E31) |
| Unique maturity structure of debt (G32) | Neutralization of incentives for future governments to manipulate inflation (E31) |
| Restructuring of debt (G33) | Time consistency under discretion (D15) |