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Ramsey Optimal Policy versus Multiple Equilibria with Fiscal and Monetary Interactions

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Document pages: 8 pages

Abstract: We consider a frictionless constant endowment economy based on Leeper (1991).In this economy, it is shown that, under an ad-hoc monetary rule and an ad-hocfiscal rule, there are two equilibria. One has active monetary policy andpassive fiscal policy, while the other has passive monetary policy and activefiscal policy. We consider an extended setup in which the policy makerminimizes a loss function under quasi-commitment, as in Schaumburg andTambalotti (2007). Under this formulation there exists a unique Ramseyequilibrium, with an interest rate peg and a passive fiscal policy. We thankJohn P. Conley, Luis de Araujo and one referree for their very helpfulcomments.

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