NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Time Consistency of Fiscal and Monetary Policy: A Solution

Mats Persson, Torsten Persson, Lars E.O. Svensson

NBER Working Paper No. 11088
Issued in January 2005
NBER Program(s):   EFG   IFM   ME

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).

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Document Object Identifier (DOI): 10.3386/w11088

Published: Mats Persson & Torsten Persson & Lars E. O. Svensson, 2006. "Time Consistency of Fiscal and Monetary Policy: A Solution," Econometrica, Econometric Society, vol. 74(1), pages 193-212, 01.

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