Federal Reserve Bank of Minneapolis Research Department The Time Consistency of Monetary and Fiscal Policies Fernando Alvarez, Patrick J. Kehoe, and Pablo Neumeyer ∗ Working Paper 616 April 2002 ABSTRACT Are optimal monetary and fiscal policies time consistent in a monetary economy? Yes, but if and only if under commitment the Friedman rule of setting nominal interest rates to zero is optimal. This result is of applied interest because the Friedman rule is optimal for the standard preferences used in applied work, those consistent with the growth facts. ∗ Alvarez, University of Chicago, Universidad T. Di Tella, and NBER; Kehoe, Federal Reserve Bank of Minneapolis, University of Minnesota, and NBER; Pablo Neumeyer, Universidad T. Di Tella and CONICET. Alvarez and Neumeyer thank Agencia de Promoción Científica y Tecnológica for financial support. Kehoe thanks the NSF for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.