NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Inflation's Role in Optimal Monetary-Fiscal Policy

Eric M. Leeper, Xuan Zhou

NBER Working Paper No. 19686
Issued in November 2013
NBER Program(s):   EFG

We study how the maturity structure of nominal government debt affects optimal monetary and fiscal policy decisions and equilibrium outcomes in the presence of distortionary taxes and sticky prices. Key findings are: (1) there is always a role for current and future inflation innovations to revalue government debt, reducing reliance on distorting taxes; (2) the role of inflation in optimal fiscal financing increases with the average maturity of government debt; (3) as average maturity rises, it is optimal to tradeoff inflation for output stabilization; (4) inflation is relatively more important as a fiscal shock absorber in high-debt than in low-debt economies; (5) in some calibrations that are relevant to U.S. data, welfare under the fully optimal monetary and fiscal policies can be made equivalent to the welfare under the conventional optimal monetary policy with passively adjusting lump-sum taxes by extending the average maturity of bond.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19686

Users who downloaded this paper also downloaded these:
Farmer and Khramov w19457 Solving and Estimating Indeterminate DSGE Models
Calvo, Coricelli, and Ottonello w19683 Jobless Recoveries During Financial Crises: Is Inflation the Way Out?
Berg, Puri, and Rocholl w19051 Loan officer Incentives and the Limits of Hard Information
Bordo and Landon-Lane w19585 Does Expansionary Monetary Policy Cause Asset Price Booms; Some Historical and Empirical Evidence
Araujo, Schommer, and Woodford w19711 Conventional and Unconventional Monetary Policy with Endogenous Collateral Constraints
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us