Hostname: page-component-cd9895bd7-jn8rn Total loading time: 0 Render date: 2024-12-23T05:06:41.288Z Has data issue: false hasContentIssue false
  • English
  • Français

U.S. TREND INFLATION REINTERPRETED: THE ROLE OF FISCAL POLICIES AND TIME-VARYING NOMINAL RIGIDITIES

Published online by Cambridge University Press:  21 March 2014

Nicola Acocella ,
Giovanni Di Bartolomeo  and
Patrizio Tirelli
Nicola Acocella
Affiliation:
Sapienza University of Rome
Giovanni Di Bartolomeo*
Affiliation:
Sapienza University of Rome
Patrizio Tirelli
Affiliation:
University of Milan Bicocca
*
Address correspondence to: Giovanni Di Bartolomeo, Department of Economics and Law, Sapienza University of Rome, Via del Castro Laurenziano, 9,00161 Rome, Italy; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

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.

Keywords

Trend InflationMonetary and Fiscal PolicyRamsey Plan
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Special Issue 6: Growth, Optimal Fiscal and Monetary Policy, and Financial Frictions , September 2015 , pp. 1294 - 1308
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Altig, David, Christiano, Lawrence J., Eichenbaum, Martin, and Linde, Jesper (2011) Firm-specific capital, nominal rigidities and the business cycle. Review of Economic Dynamics 14, 225–247.CrossRefGoogle Scholar
Auerbach, Alan J. (2002) The Bush tax cut and national saving. National Tax Journal 55, 387–407.CrossRefGoogle Scholar
Bartels, Larry M. (2008) Unequal Democracy: The Political Economy of the New Gilded Age. Princeton, NJ: Princeton University Press.Google Scholar
Benati, Luca (2008) Investigating inflation persistence across monetary regimes. Quarterly Journal of Economics 123, 1005–1060.CrossRefGoogle Scholar
Benati, Luca (2009) Are Intrinsic Inflation Persistence Models Structural in the Sense of Lucas (1976)? European Central Bank working paper 1038.CrossRefGoogle Scholar
Cagan, Phillip (1956) The monetary dynamics of hyperinflation. In Friedman, Milton (ed.), Studies in the Quantity Theory of Money, pp. 25–117. Chicago: University of Chicago Press.Google Scholar
Carlstrom, Charles T., Fuerst, Timothy S., and Paustian, Matthias (2009) Inflation persistence, monetary policy, and the Great Moderation. Journal of Money, Credit and Banking 41, 767–786.CrossRefGoogle Scholar
Cogley, Timothy and Sargent, Thomas J. (2005) The conquest of US inflation: Learning and robustness to model uncertainty. Review of Economic Dynamics 8, 528–563.CrossRefGoogle Scholar
Cogley, Timothy and Sbordone, Argia (2008) Trend inflation, indexation and inflation persistence in the New Keynesian Phillips curve. American Economic Review 98, 2101–2126.CrossRefGoogle Scholar
Coibion, Olivier and Gorodnichenko, Yuriy (2011) Monetary policy, trend inflation, and the Great Moderation: An alternative interpretation. American Economic Review 101, 341–370.CrossRefGoogle Scholar
de V. Cavalcanti, Tiago V. and Villamil, Anne P. (2003) Optimal inflation tax and structural reform. Macroeconomic Dynamics 7, 333–362.CrossRefGoogle Scholar
Di Bartolomeo, Giovanni, Tirelli, Patrizio, and Acocella, Nicola (2011) The Optimal Inflation Rate Revisited. Working paper 69, Department of Communication, University of Teramo.Google Scholar
Di Bartolomeo, Giovanni, Tirelli, Patrizio, and Acocella, Nicola (2013) The Comeback of Inflation as an Optimal Public Finance Tool. Working paper 100, Department of Communication, University of Teramo; also forthcoming in International Journal of Central Banking.CrossRefGoogle Scholar
Fernández-Villaverde, Jesús and Rubio-Ramírez, Juan (2008) How structural are structural parameters? In Acemoglu, Daron, Rogoff, Kenneth, and Woodford, Michael (eds.), NBER Macroeconomics Annual 2007, pp. 83–137. Cambridge, MA: MIT Press.Google Scholar
Gale, William G. and Orszag, Peter R. (2004a) Tax policy in the Bush Administration: Distributional effects. Tax Notes 104, 1559–1566.Google Scholar
Gale, William G. and Orszag, Peter R. (2004b) Tax policy in the Bush Administration: Revenue and budget effects. Tax Notes 105, 105–118.Google Scholar
Gambetti, Luca, Pappa, Evi, and Canova, Fabio (2008) The structural dynamics of US output and inflation: What explains the changes? Journal of Money, Credit and Banking 40, 369–388.CrossRefGoogle Scholar
Graham, Liam and Snower, Dennis J. (2013) Hyperbolic discounting and positive optimal inflation. Macroeconomic Dynamics 17, 591–620.CrossRefGoogle Scholar
Guerron-Quintana, Pablo A. (2009) Money demand heterogeneity and the great moderation. Journal of Monetary Economics 56, 255–266.CrossRefGoogle Scholar
Hofmann, Boris, Peersman, Gert, and Straub, Roland (2012) Time variation in U.S. wage dynamics. Journal of Monetary Economics 59, 769–783.CrossRefGoogle Scholar
Ireland, Peter N. (2007) Changes in the Federal Reserve inflation target: Causes and consequences. Journal of Money, Credit and Banking 39, 1851–2110.CrossRefGoogle Scholar
Justiniano, Alejandro and Primiceri, Giorgio (2008) The time-varying volatility of macroeconomic fluctuations. American Economic Review 98, 604–641.CrossRefGoogle Scholar
Krugman, Paul (2007) The Conscience of a Liberal. New York: W.W. Norton.Google Scholar
Milani, Fabio (2009) Learning and the Evolution of the Fed's Inflation Target. Mimeo, University of California Irvine.CrossRefGoogle Scholar
Phelps, Edmund S. (1973) Inflation in the theory of public finance. Swedish Journal of Economics 75, 67–82.CrossRefGoogle Scholar
Primiceri, Giorgio E. (2005) Time varying structural vector autoregressions and monetary policy. Review of Economic Studies 72, 821–852.CrossRefGoogle Scholar
Rotemberg, Julio J. (1982) Sticky prices in the United States. Journal of Political Economy 90, 1187–1211.CrossRefGoogle Scholar
Sargent, Thomas J. (2001) The Conquest of the American Inflation. Princeton, NJ: Princeton University Press.Google Scholar
Sargent, Thomas J., Williams, Noah, and Zha, Tao (2006) Shocks and government beliefs: The rise and fall of American inflation. American Economic Review 96, 1193–1224.CrossRefGoogle Scholar
Schmitt-Grohé, Stephanie and Uribe, Martin (2004a) Optimal fiscal and monetary policy under sticky prices. Journal of Economic Theory 114, 198–230.CrossRefGoogle Scholar
Schmitt-Grohé, Stephanie and Uribe, Martin (2004b) Solving dynamic general equilibrium models using a second-order approximation to the policy function. Journal of Economic Dynamics and Control 28, 755–775.CrossRefGoogle Scholar
Schmitt-Grohé, Stephanie and Uribe, Martin (2011) The optimal rate of inflation. In Friedman, Benjamin M. and Woodford, Michael (eds.), Handbook of Monetary Economics, pp. 723–828. Amsterdam: Elsevier.Google Scholar
Sims, Chris A. (1994) A simple model for study of the determination of the price level and the interaction of monetary and fiscal policy. Economic Theory 4, 381–399.CrossRefGoogle Scholar
Sims, Chris A. and Zha, Tao (2006) Were there regime switches in U.S. monetary policy? American Economic Review 96, 54–81.CrossRefGoogle Scholar
Smets, Frank and Wouters, Rafael (2007) Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review 97, 586–606.CrossRefGoogle Scholar
Stock, James H. and Watson, Mark W. (2003) Has the business cycle changed and why? In Gertler, Mark and Rogoff, Kenneth (eds.), NBER Macroeconomics Annual 2002, pp. 159–218. Cambridge, MA: MIT Press.Google Scholar
Taylor, John B. (2010) Macroeconomic lessons from the Great Deviation. In Acemoglu, Daron and Woodford, Michael (eds.), NBER Macroeconomics Annual 2009, pp. 387–395. Cambridge, MA: MIT Press.Google Scholar
Taylor, John B. (2012) Monetary policy rules work and discretion doesn't: A tale of two eras. Journal of Money, Credit and Banking 44, 1017–1032.CrossRefGoogle Scholar
Theodoridis, Konstantinos, Yates, Tony, Giraitis, Liudas, and Kapetanios, George (2012) From time-varying macro-dynamics to time-varying estimates of DSGE parameters. Mimeo, Bank of England.Google Scholar