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On the Time Consistency of Optimal Policy in a Monetary Economy

Guillermo A. Calvo
Econometrica
Vol. 46, No. 6 (Nov., 1978), pp. 1411-1428
Published by: The Econometric Society
DOI: 10.2307/1913836
Stable URL: http://www.jstor.org/stable/1913836
Page Count: 18
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On the Time Consistency of Optimal Policy in a Monetary Economy
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Abstract

We study the time consistency of optimal monetary policy in a framework akin to the one in [12, Ch. 1] but we assume away lump sum taxation--all taxes are distortionary. Our major result is that under perfect foresight (as defined in [8, 23]) optimal monetary policy is bound to be time inconsistent. The paper is closely related to the previous works of Auernheimer [2], and Kydland and Prescott [15].

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