Econometrica: Nov, 1978, Volume 46, Issue 6

On the Time Consistency of Optimal Policy in a Monetary Economy

https://doi.org/0012-9682(197811)46:6<1411:OTTCOO>2.0.CO;2-K
p. 1411-1428

Guillermo A. Calvo

We study the time consistency of optimal monetary policy in a framework akin to the one in [12, Ch. 1] but we assume away lump sum taxation--all taxes are distortionary. Our major result is that under perfect foresight (as defined in [8, 23]) optimal monetary policy is bound to be time inconsistent. The paper is closely related to the previous works of Auernheimer [2], and Kydland and Prescott [15].