Ramsey Optimal Policy in the New-Keynesian Model with Public Debt

Jean-Bernard Chatelain (1, 2) , Kirsten Ralf (3)

1 PSE - Paris School of Economics
2 PJSE - Paris Jourdan Sciences Economiques
3 Ecole Supérieure du Commerce Extérieur - ESCE

This paper compares Ramsey optimal policy for the new-Keynesian model with public debt with its .scal theory of the price level (FTPL) equilibrium. Both the fiscal theory of the price level and Ramsey optimal policy implies that a de.cit shock is instantaneously followed by an increase of in.ation and output gap. But each optimal policy parameters belongs in di¤erent sets with respect to FTPL. The optimal .scal rule parameter implies local stability of public debt dynamics ("passive fiscal policy"). The optimal Taylor rule parameter for in.ation is larger than one. The optimal Taylor rule parameter for output gap is negative, because of the intertemporal substitution e¤ect of interest rate on output gap. Both Taylor rule optimal parameters implies the local stability of inflation and output gap dynamics.

Keywords: Fiscal theory of the Price Level; Ramsey optimal policy

Domains: Economics and Finance

Jean-Bernard Chatelain, Kirsten Ralf. Ramsey Optimal Policy in the New-Keynesian Model with Public Debt. 2019. ⟨halshs-02278781⟩