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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.

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  • 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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    Cited by:

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    7. Herrenbrueck, Lucas, 2014. "Quantitative Easing and the Liquidity Channel of Monetary Policy," MPRA Paper 70686, University Library of Munich, Germany, revised 10 Apr 2016.
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    9. Athanasios Geromichalos & Lucas Herrenbrueck, 2017. "The Liquidity-Augmented Model of Macroeconomic Aggregates," Discussion Papers dp17-16, Department of Economics, Simon Fraser University.
    10. Douglas Silveira & Ricardo B. L. M. Oscar, 2024. "Inflation Targeting Regimes in Emerging Market Economies: To Invest or Not to Invest?," Computational Economics, Springer;Society for Computational Economics, vol. 64(4), pages 2097-2129, October.
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    21. Luis Araujo & Leo Ferraris, 2020. "Money, Bonds, and the Liquidity Trap," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(7), pages 1853-1867, October.
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