Econometrica Vol. 74 No. 1 2006

Time Consistency of Fiscal and Monetary Policy: A Solution

Mats Persson¹; Torsten Persson¹; Lars E. O. Svensson²

¹ Stockholm University · ² Princeton University

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.

DOI

10.1111/j.1468-0262.2006.00653.x

Volume

74

Issue

1

Pages

193-212

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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