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On the Time Inconsistency of Optimal Monetary and Fiscal Policies with Many Consumer Goods *
Author(s) -
Domínguez Begoña,
GomisPorqueras Pedro
Publication year - 2021
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12399
Subject(s) - economics , differential (mechanical device) , cash , monetary economics , dynamic inconsistency , time consistency , consistency (knowledge bases) , fiscal policy , monetary policy , microeconomics , macroeconomics , financial economics , geometry , mathematics , engineering , aerospace engineering
In this paper, we study the time consistency of optimal policies in an environment where agents use cash to purchase many consumer goods and where those goods might be taxed at differential rates. Our main result is that optimal monetary and fiscal policies are, in general, time‐inconsistent, because the number of bond instruments is insufficient to influence all future fiscal decisions. However, there is one special case where optimal policies are time‐consistent, which is when differential tax rates across cash goods are optimally zero.