The time consistency of optimal monetary and fiscal policies

Fernando Alvarez, Patrick J. Kehoe, Pablo Andrés Neumeyer

Research output: Contribution to journalArticle

26 Citations (Scopus)

Abstract

We show that optimal monetary and fiscal policies are time consistent for a class of economies often used in applied work, economies appealing because they are consistent with the growth facts. We establish our results in two steps. We first show that for this class of economies, the Friedman rule of setting nominal interest rates to zero is optimal under commitment. We then show that optimal policies are time consistent if the Friedman rule is optimal. For our benchmark economy in which the time consistency problem is most severe, the converse also holds: if optimal policies are time consistent, then the Friedman rule is optimal.

Original languageEnglish (US)
Pages (from-to)541-567
Number of pages27
JournalEconometrica
Volume72
Issue number2
DOIs
StatePublished - Mar 1 2004

Fingerprint

Time consistency
Optimal fiscal and monetary policy
Friedman rule
Optimal policy
Benchmark
Nominal interest rate

Keywords

  • Friedman rule
  • Maturity structure
  • Sustainable plans
  • Time inconsistency

Cite this

The time consistency of optimal monetary and fiscal policies. / Alvarez, Fernando; Kehoe, Patrick J.; Neumeyer, Pablo Andrés.

In: Econometrica, Vol. 72, No. 2, 01.03.2004, p. 541-567.

Research output: Contribution to journalArticle

Alvarez, Fernando ; Kehoe, Patrick J. ; Neumeyer, Pablo Andrés. / The time consistency of optimal monetary and fiscal policies. In: Econometrica. 2004 ; Vol. 72, No. 2. pp. 541-567.
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