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Fiscal Policy Under Balanced Budget And Indeterminacy: A New Keynesian Perspective

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  • Giovanni Di Bartolomeo
  • Marco Manzo

Abstract

We investigate the effect of fiscal policy on equilibrium determinacy in a New Keynesian economy with rule-of-thumb (liquidity constrained) consumers and capital accumulation by focusing on the inter-action between monetary policy and taxation under the assumption of balanced budget. Our main finding is that taxation of firms� monopoly rents reduces the parameter range within which the Taylor principle is insufficient to guarantee equilibrium determinacy; hence it supports the determinacy of the rational expectation equilibrium.

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Bibliographic Info

Article provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.

Volume (Year): 57 (2010)
Issue (Month): 4 (09)
Pages: 455-472

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Handle: RePEc:bla:scotjp:v:57:y:2010:i:4:p:455-472

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Cited by:
  1. Manzo, Marco & Monteduro, Maria Teresa, 2010. "From IRAP to CBIT: tax distortions and redistributive effects," MPRA Paper 28070, University Library of Munich, Germany.

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