Revised version PDF Working-paper version with numerical examples PDF MatLab programs
Mats Persson
Institute for International Economic Studies
Torsten Persson
Institute for International Economic Studies
Lars E.O. Svensson
Princeton University
First draft: October 2004
This version: August 2005
Econometrica
74 (2006) 193-212
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, Persson, and Svensson (1987), Calvo and Obstfeld (1990), and Alvarez, Kehoe, and Neumeyer (2004).
JEL Classification: E310, E520, H210
Keywords: time consistency, Ramsey policy, surprise inflation