The Comeback of Inflation as an Optimal Public Finance Tool

22 Pages Posted: 18 Dec 2013

See all articles by Giovanni Di Bartolomeo

Giovanni Di Bartolomeo

University of Teramo

Patrizio Tirelli

Department of Economics and Management; Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

Nicola Acocella

University of Rome I - Department of Methods and Models for Economics, Territory and Finance (MEMOTEF)

Date Written: December 18, 2013

Abstract

We challenge the widely held belief that New-Keynesian models cannot predict optimal positive inflation rates. In fact these are justified by the Phelps argument that monetary financing can alleviate the burden of distortionary taxation. We obtain this result because, in contrast with previous contributions, our model accounts for public transfers as a component of …scale outlays. We also contradict the view that the Ramsey policy should minimize inflation volatility and induce near random walk dynamics of public debt in the long-run. In our model it should instead stabilize debt-to-GDP ratios in order to mitigate steady-state distortions. Our results thus provide theoretical support to policy-oriented analyses which call for a reversal of debt accumulated in the aftermath of the 2008 financial crisis.

Keywords: trend in‡ation, monetary and fiscal policy, Ramsey plan

JEL Classification: E52, E58, J51, E24.

Suggested Citation

Di Bartolomeo, Giovanni and Tirelli, Patrizio and Acocella, Nicola, The Comeback of Inflation as an Optimal Public Finance Tool (December 18, 2013). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 263, Available at SSRN: https://ssrn.com/abstract=2369183 or http://dx.doi.org/10.2139/ssrn.2369183

Giovanni Di Bartolomeo

University of Teramo ( email )

Campus Coste S. Agostino
Via R. Balzarini 1, Località Colleparco
Teramo, TE 64100
Italy

Patrizio Tirelli (Contact Author)

Department of Economics and Management ( email )

Corso Strada Nuova, 65
27100 Pavia, 27100
Italy

HOME PAGE: http://https://sites.google.com/site/patriziotirellihomepage/

Università degli Studi di Milano-Bicocca - Center for European Studies (CefES)

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

Nicola Acocella

University of Rome I - Department of Methods and Models for Economics, Territory and Finance (MEMOTEF) ( email )

Via del Castro Laurenziano 9
Roma, Roma 00161
Italy
+390649766359 (Phone)

HOME PAGE: http://www.memotef.uniroma1.it/newdip/utenti/acocellanicola/

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