Hostname: page-component-848d4c4894-p2v8j Total loading time: 0.001 Render date: 2024-05-23T05:35:50.023Z Has data issue: false hasContentIssue false

DOES THE TIMING OF THE CASH-IN-ADVANCE CONSTRAINT MATTER FOR OPTIMAL FISCAL AND MONETARY POLICY?

Published online by Cambridge University Press:  01 May 2009

Sanjay K. Chugh*
Affiliation:
University of Maryland
*
Address correspondence to: Sanjay K. Chugh, 3105 Tydings Hall, Department of Economics, University of Maryland, College Park, MD 20742, USA; e-mail: chughs@econ.umd.edu.

Abstract

I demonstrate that the precise timing of financial markets and goods markets in a simple cash good/credit good model does not matter for the main results in the Ramsey literature on optimal fiscal and monetary policy. In Ramsey models based on Lucas and Stokey [Journal of Monetary Economics 12, 55–93 (1983)] and Chari, Christiano, and Kehoe [Journal of Money, Credit, and Banking 23, 519–539 (1991)], nominal money holdings are freely adjustable in response to shocks in the period in which they will be used to purchase consumption. In contrast, under Svensson [Journal of Political Economy 93, 919–944 (1985)] timing, nominal balances cannot be adjusted in the period they will be used. The broad finding is that benchmark Ramsey results are not very sensitive to this slight, ultimately ad hoc, modification. In particular, optimal inflation continues to display very high variability just as in the original models, although this can differ depending on exactly which exogenous processes are driving the economy. That the basic results in the Ramsey literature are not sensitive to the choice of cash/credit timing is reassuring as Ramsey analysis is applied to an ever-expanding set of model environments.

Type
Articles
Copyright
Copyright © Cambridge University Press 2009

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.)

References

REFERENCES

Arseneau, David M. and Chugh, Sanjay K. (2008) Optimal fiscal and monetary policy with costly wage bargaining. Journal of Monetary Economics 55, 14011414.CrossRefGoogle Scholar
Aruoba, S. Boragan and Chugh, Sanjay K. (2006) Optimal Fiscal and Monetary Policy When Money Is Essential. International Finance Discussion Paper no. 880, Board of Governors of the Federal Reserve System.CrossRefGoogle Scholar
Chari, V.V., Christiano, Lawrence, and Kehoe, Patrick (1991) Optimal fiscal and monetary policy: Some recent results. Journal of Money, Credit, and Banking 23, 519539.CrossRefGoogle Scholar
Chari, V.V. and Kehoe, Patrick J. (1999) In Taylor, John B. and Woodford, Michael (eds.), Optimal Fiscal and Monetary Policy Handbook of Macroeconomics, Vol. 1C. Amsterdam: Elsevier.CrossRefGoogle Scholar
Chugh, Sanjay K. (2006) Optimal fiscal and monetary policy with sticky wages and sticky prices. Review of Economic Dynamics 9, 683714.CrossRefGoogle Scholar
Chugh, Sanjay K. (2007) Optimal inflation persistence: Ramsey taxation with capital and habits. Journal of Monetary Economics 54, 18091836.CrossRefGoogle Scholar
Lagos, Ricardo and Wright, Randall (2005) A unified framework for monetary theory and policy analysis. Journal of Political Economy 113, 463484.CrossRefGoogle Scholar
Lucas, Robert E. Jr., and Stokey, Nancy L. (1983) Optimal fiscal and monetary policy in an economy without capital. Journal of Monetary Economics 12, 5593.CrossRefGoogle Scholar
Schmitt-Grohe, Stephanie and Uribe, Martin (2004a) Optimal fiscal and monetary policy under imperfect competition. Journal of Macroeconomics 26, 183209.CrossRefGoogle Scholar
Schmitt-Grohe, Stephanie and Uribe, Martin (2004b) Optimal fiscal and monetary policy under sticky prices. Journal of Economic Theory 114, 198230.CrossRefGoogle Scholar
Schmitt-Grohe, Stephanie and Uribe, Martin (2004c) Solving dynamic general equilibrium models using a second-order approximation to the policy function. Journal of Economic Dynamics and Control 28, 755775.CrossRefGoogle Scholar
Schmitt-Grohe, Stephanie and Uribe, Martin (2005) Optimal fiscal and monetary policy in a medium-scale macroeconomic model. NBER Macroeconomics Annual 2005. Cambridge, MA: NBER.Google Scholar
Siu, Henry E. (2004) Optimal fiscal and monetary policy with sticky prices. Journal of Monetary Economics 51, 576607.CrossRefGoogle Scholar
Svensson, Lars E.O. (1985) Money and asset prices in a cash-in-advance economy. Journal of Political Economy 93, 919944.Google Scholar