Does the Timing of the Cash-in-Advance Constraint Matter for Optimal Fiscal and Monetary Policy?

We quantitatively demonstrate that the precise timing of financial markets and goods markets in a flexible-price cash good/credit good model does not matter for the main baseline results in the Ramsey literature on optimal fiscal and monetary policy. This result is reassuring because Ramsey analysis, in the tradition begun by Lucas and Stokey (1983) and Chari, Christiano, and Kehoe (1991), has been applied to a quickly-expanding rich class of DGSE models recently, making it important to know whether models based on these original structures have been pursuing a mirage. In the original models, the timing is such that nominal money holdings are freely-adjustable in response to shocks in the period in which they will be used to purchase consumption. We alter this timing convention so that nominal balances cannot be adjusted in the period they will be used — the timing assumption of Svensson (1985) — to study how sensitive the baseline results are to this slight, and ultimately ad-hoc, modification. Our broad finding is that Ramsey-optimal inflation continues to display very high variability just as in the original models, although this can differ depending on exactly which exogenous processes are driving the economy. The basic intuition for the result is that, no matter the timing of markets, inflation variability creates no relative price distortions. Thus, interpretation of results from the recent spate of Ramsey studies, which have had as a primary motivation the determination of the optimal degree of inflation stabilization in the presence of various features and frictions in the economy, is not blurred by the choice of cash/credit timing.