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Incentive-feasible deflation

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  • Andolfatto, David

Abstract

For competitive economies in which the real rate of return on money is too low, the standard prescription is to engineer a deflation—that is, to operate monetary policy according to the Friedman rule. Implicit in this recommendation is the availability of a lump-sum tax instrument. In this paper, I view lump-sum tax obligations as a form of debt subject to default. While individuals may want to honor such obligations ex ante, a lack of commitment (the sine qua non of modern monetary theory) may prevent them from the following through on their promises ex post. When this is the case, there may exist an incentive-induced limit to deflationary policy.

Suggested Citation

  • Andolfatto, David, 2013. "Incentive-feasible deflation," Journal of Monetary Economics, Elsevier, vol. 60(4), pages 383-390.
    • Handle: RePEc:eee:moneco:v:60:y:2013:i:4:p:383-390
    DOI: 10.1016/j.jmoneco.2013.03.002
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