Optimal Time Consistent Monetary Policy

Optimal time-consistent monetary and fiscal policy under sticky prices

This paper studies optimal monetary and fiscal policy in a stochastic economy with sticky prices and monopolistic competition on its product markets. Our main objective is to characterize optimal time-consistent (Markov) policies and to compare their characteristics to the ones implemented by a Ramsey policy maker. We perform this comparison within the framework of a stochastic production econo...

Optimal and Time Consistent Monetary and Fiscal Policy in a Small Open Economy

This paper shows that optimal fiscal and monetary policy is generally time consistent in a standard small open economy. Further, there exist many maturity structures of public debt capable of rendering the optimal policy time consistent. This result is in sharp contrast with that obtained by others in the context of closedeconomy models. In the closed economy, the time consistency of optimal mo...

Time consistent monetary policy with endogenous price rigidity

I characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion. Firms have the option to increase their frequency of price change, at a cost, in response to higher inflation. Previous studies, which assume a constant degree of price rigidity across inflation regimes, find two time consistent equilibria — one with low ...

1 Optimal Monetary Policy

We re-examine optimal monetary policy when lump-sum taxes are unavailable. Under commitment, we show that, with alternative utility functions to that considered in Nicolini’s related analysis, the direction of the incentive to cheat may depend on the initial level of government debt, with low debt creating an incentive towards surprise deflation, but high debt the reverse. Under discretion, we ...

Optimal Monetary Stabilization Policy∗