Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions

Chatelain, Jean-Bernard and Ralf, Kirsten (2020): Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions. Published in: Economics Bulletin , Vol. 1, No. 40 (5 February 2020): pp. 140-147.

Abstract

We consider a frictionless constant endowment economy based on Leeper (1991). In this economy, it is shown that, under an ad-hoc monetary rule and an ad-hoc fiscal rule, there are two equilibria. One has active monetary policy and passive fiscal policy, while the other has passive monetary policy and active fiscal policy. We consider an extended set-up in which the policy maker minimizes a loss function under quasi-commitment, as in Schaumburg and Tambalotti (2007). Under this formulation there exists a unique Ramsey equilibrium, with an interest rate peg and a passive fiscal policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Frictionless endowment economy, Fiscal theory of the Price Level, Ramsey optimal policy, Interest Rate Rule, Fiscal Rule.
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy

References

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Bai, Y. and E.M. Leeper (2017) "Fiscal stabilization vs. passivity" Economics Letters 154, 105-108.

Chatelain, J. B. and K. Ralf (2019) "A Simple Algorithm for Solving Ramsey Optimal Policy with Exogenous Forcing Variables" Economics Bulletin 39(4), 2429-2440.

Chatelain, J. B. and K. Ralf (2020) "Imperfect Credibility versus No Credibility of Optimal Monetary Policy" Revue Economique, forthcoming.

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Leeper, E. M. (1991) "Equilibria under `active'and `passive'monetary and fiscal policies" Journal of monetary Economics 27(1), 129-147.

Schaumburg, E. and A. Tambalotti (2007) "An investigation of the gains from commitment in monetary policy" Journal of Monetary Economics 54(2), 302-324.