This paper offers a reinterpretation of the Fed's time-varying implicit inflation target, based on two considerations. The first is that the need to alleviate the burden of distortionary taxation may justify the choice of a positive inflation rate. The second is based on compelling evidence that the degree of price and wage indexation falls with trend inflation. In fact, we find that a proper characterization of the joint evolution of fiscal variables and nominal rigidities has a strong impact on the Ramsey optimal policies, implying optimal inflation dynamics that are consistent with the observed evolution of U.S. trend inflation. By contrast, tax policies have been too lax, especially at the time of the controversial Bush tax cuts. Copyright © Cambridge University Press 2014

Acocella, N., Di Bartolomeo, G., Tirelli, P. (2014). U.S. trend inflation reinterpreted: the role of fiscal policies and time-varying nominal rigidities. MACROECONOMIC DYNAMICS, 19(6), 1294-1308 [10.1017/S1365100513000837].

U.S. trend inflation reinterpreted: the role of fiscal policies and time-varying nominal rigidities

TIRELLI, PATRIZIO
Ultimo
2014

Abstract

This paper offers a reinterpretation of the Fed's time-varying implicit inflation target, based on two considerations. The first is that the need to alleviate the burden of distortionary taxation may justify the choice of a positive inflation rate. The second is based on compelling evidence that the degree of price and wage indexation falls with trend inflation. In fact, we find that a proper characterization of the joint evolution of fiscal variables and nominal rigidities has a strong impact on the Ramsey optimal policies, implying optimal inflation dynamics that are consistent with the observed evolution of U.S. trend inflation. By contrast, tax policies have been too lax, especially at the time of the controversial Bush tax cuts. Copyright © Cambridge University Press 2014
Articolo in rivista - Articolo scientifico
Monetary and Fiscal Policy; Ramsey Plan; Trend Inflation; Economics and Econometrics
English
2014
19
6
1294
1308
none
Acocella, N., Di Bartolomeo, G., Tirelli, P. (2014). U.S. trend inflation reinterpreted: the role of fiscal policies and time-varying nominal rigidities. MACROECONOMIC DYNAMICS, 19(6), 1294-1308 [10.1017/S1365100513000837].
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10281/61512
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