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

  • Sanjay K. Chugh (a1)

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.

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Corresponding author

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.

References

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Keywords

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

  • Sanjay K. Chugh (a1)

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