Hostname: page-component-586b7cd67f-l7hp2 Total loading time: 0 Render date: 2024-11-27T21:15:00.001Z Has data issue: false hasContentIssue false
  • English
  • Français

RAMSEY OPTIMAL POLICY IN THE NEW-KEYNESIAN MODEL WITH PUBLIC DEBT

Published online by Cambridge University Press:  25 January 2021

Jean-Bernard Chatelain  and
Kirsten Ralf
Jean-Bernard Chatelain*
Affiliation:
Paris School of Economics
Kirsten Ralf
Affiliation:
INSEEC U. Research Center ESCE
*
Address correspondence to Jean-Bernard Chatelain, Paris School of Economics, Université Paris 1 Panthéon Sorbonne, 48 Boulevard Jourdan, 75014Paris, France. e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

In the discrete-time new-Keynesian model with public debt, Ramsey optimal policy eliminates the indeterminacy of simple-rules multiple equilibria between the fiscal theory of the price level versus new-Keynesian versus an unpleasant equilibrium. If public debt volatility is taken into account into the loss function, the interest rate responds to public debt besides inflation and output gap. Else, the Taylor rule is identical to Ramsey optimal policy when there is zero public debt. The optimal fiscal-rule parameter implies the local stability of public-debt dynamics (“passive” fiscal policy).

Keywords

BifurcationsFiscal Theory of the Price LevelRamsey Optimal PolicyNew-Keynesian ModelMultiple Equilibria
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 6 , September 2022 , pp. 1588 - 1614
Copyright
© Cambridge University Press 2021

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank two referees and Maxime Menuet for very insightful comments as well as participants to the Clermont-Ferrand workshop on monetary and fiscal interactions, January 2020.

References

REFERENCES

Azariadis, C. (1993) Intertemporal Macroeconomics. Cambridge: Blackwell.Google Scholar
Barnett, W. A., Bella, G., Ghosh, T., Mattana, P. and Venturi, B. (2020) Shilnikov Chaos, Low Interest Rates, and New Keynesian Macroeconomics. MPRA Working paper.Google Scholar
Barnett, W. A. and Chen, G. (2015) Bifurcation of macroeconometric models and robustness of dynamical inferences. Foundations and Trends in Econometrics 8, 1–144.CrossRefGoogle Scholar
Barnett, W. A. and Duzhak, E. A. (2008) Non-robust dynamic inferences from macroeconometric models: Bifurcation stratification of confidence region. Physica A 387, 3817–3825.CrossRefGoogle Scholar
Barnett, W. A. and Duzhak, E. A. (2010) Empirical assessment of bifurcations regions within New-Keynesian models. Economic Theory 45, 99–128.CrossRefGoogle Scholar
Bella, G., Mattana, P. and Venturi, B. (2017) Shilnikov chaos in the Lucas model of endogenous growth. Journal of Economic Theory 172, 451–477.CrossRefGoogle Scholar
Bénassy, J. P. (2009) Interest rate rules and global determinacy: An alternative to the Taylor principle. International Journal of Economic Theory 5(4), 359–374.CrossRefGoogle Scholar
Blanchard, O. J. and Kahn, C. (1980) The solution of linear difference models under rational expectations. Econometrica 48, 1305–1311.Google Scholar
Cardani, R., L. Menna, L. and Tirelli, P. (2018). The optimal policy mix to achieve public debt consolidation. Macroeconomic Dynamics, 1–17.Google Scholar
Chatelain, J. B. and Ralf, K. (2019) A simple algorithm for solving Ramsey optimal policy with exogenous forcing variables. Economics Bulletin 39(4), 2429–2440.Google Scholar
Chatelain, J. B. and Ralf, K. (2020a) Hopf bifurcation from New-Keynesian taylor rule to Ramsey optimal policy. Macroeconomic Dynamics, online 17th january.Google Scholar
Chatelain, J. B. and Ralf, K. (2020b) Ramsey optimal policy versus multiple equilibria with Fiscal and Monetary interactions. Economics Bulletin 40(1), 140–147.Google Scholar
Cochrane, J. H. (2011) Determinacy and identification with Taylor rules. Journal of Political Economy 119(3), 565–615.CrossRefGoogle Scholar
Cochrane, J. H. (2019). The Fiscal Theory of the Price Level. Forthcoming book, version february 5. J.H. Cochrane’s website.Google Scholar
Drygalla, A., Holtemöller, O. and Kiesel, K. (2020) The effects of fiscal policy in an estimated DSGE model - The case of the German Stimulus Packages during the great recession. Macroeconomic Dynamics 24(6), 1315–1345.CrossRefGoogle Scholar
Freiling, G. (2002) A survey of nonsymmetric Riccati equations. Linear Algebra and its Applications 351, 243–270.CrossRefGoogle Scholar
Gal, J. (2015) Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework and its Applications. Princeton University Press.Google Scholar
Gomis-Porqueras, P. and Zhang, C. (2019) Optimal monetary and fiscal policy in a currency union with frictional goods markets. Macroeconomic Dynamics, 1–29.Google Scholar
Hansen, L. P. and Sargent, T. J. (2008) Robustness. Princeton University Press.Google Scholar
Havránek, T. (2015). Measuring intertemporal substitution: The importance of method choices and selective reporting. Journal of the European Economic Association 13(6), 1180–1204.CrossRefGoogle Scholar
Jia, P. (2020) The macroeconomic impact of monetary-fiscal policy in a “fiscal dominance” world. Macroeconomic Dynamics 24(3), 670–707.CrossRefGoogle Scholar
Kalman, R. E. (1960) Contributions to the theory of optimal control. Boletin de la Sociedad Matematica Mexicana 5, 102–109.Google Scholar
Krener, A. J., Kang, W. and Chang, D. E. (2004) Control bifurcations. IEEE Transactions on Automatic Control 49(8), 1231–1246.10.1109/TAC.2004.832199CrossRefGoogle Scholar
Leeper, E. M. (1991) Equilibria under ‘active’ and ‘passive’ monetary and fiscal policies. Journal of Monetary Economics 27(1), 129–147.CrossRefGoogle Scholar
Lucas, R. E. Jr (1988) On the mechanics of economic development. Journal of Monetary Economics 22(1), 3–42.CrossRefGoogle Scholar
Mavroeidis, S., Plagborg-Mø ller, M. and Stock, J. H. (2014) Empirical evidence on inflation expectations in the New Keynesian Phillips Curve. Journal of Economic Literature 52(1), 124–188.CrossRefGoogle Scholar
Ott, E., Grebogi, C. and Yorke, J. A. (1990) Controlling chaos. Physical Review Letters 64, 1196–1199.CrossRefGoogle ScholarPubMed
Schaumburg, E. and Tambalotti, A. (2007) An investigation of the gains from commitment in monetary policy. Journal of Monetary Economics 54(2), 302–324.Google Scholar
Shilnikov, L. P. (1965) A case of the existence of a denumerable set of periodic motions. Doklady Akademii Nauk SSSR 160(3), 558–561.Google Scholar
Simon, H. A. (1956) Dynamic programming under incertainty with a quadratic criterion function. Econometrica 24(1), 74–81.CrossRefGoogle Scholar
Sims, C. A. (2016) Active Fiscal, Passive Money Equilibrium in a Purely Backward-Looking Model. Manuscript, Princeton University.Google Scholar
Svensson, L. E. (2003) What is wrong with Taylor rules? Using judgment in monetary policy through targeting rules. Journal of Economic Literature 41(2), 426–477.CrossRefGoogle Scholar
Wonham, W. N. (1967) On pole assignment in multi-input controllable linear system. IEEE Transactions on Automatic Control 12(6), 660–665.CrossRefGoogle Scholar
Woodford, M. (1996) Control of the Public Debt: A Requirement for Price Stability? NBER Working Paper 5684.CrossRefGoogle Scholar
Woodford, M. (1998) Control of the public debt: A requirement for price stability?. In: The Debt Burden and Its Consequences for Monetary Policy, pp. 117–158. London: Palgrave Macmillan.CrossRefGoogle Scholar