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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].
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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

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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.

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