Time Consistency of Fiscal and Monetary Policy: A Solution

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,

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