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The effectiveness of government debt for demand management: Sensitivity to monetary policy rules

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  • Ascari, Guido
  • Rankin, Neil

Abstract

We construct a staggered-price dynamic general equilibrium model with overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make an increase in government debt, with associated changes in lump-sum taxation, effective in raising short-run output. However we find this is very sensitive to the monetary policy rule. A permanent increase in debt under a basic Taylor Rule does not raise output. To make debt effective we need either a temporary nominal interest rate peg; or inertia in the rule; or an exogenous money supply policy; or to make the debt increase temporary.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 8 ()
Pages: 1544-1566

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:8:p:1544-1566

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Staggered prices; Overlapping generations; Government debt; Fiscal policy effectiveness; Monetary policy rules;

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References

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  1. Jordi Galí & J. David López-Salido, 2003. "Understanding the Effects of Government Spending on Consumption," Working Papers 73, Barcelona Graduate School of Economics.
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  4. Jagjit S. Chadha & Charles Nolan, 2004. "Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy," CDMA Working Paper Series 200406, Centre for Dynamic Macroeconomic Analysis.
  5. Ascari, Guido, 2002. "Staggered Price and Trend Inflation:Some Nuisances," Royal Economic Society Annual Conference 2002 10, Royal Economic Society.
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  9. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
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  17. Tatiana Kirsanova & Campbell Leith & Simon Wren-Lewis, 2009. "Monetary and Fiscal Policy Interaction: The Current Consensus Assignment in the Light of Recent Developments," Economic Journal, Royal Economic Society, vol. 119(541), pages F482-F496, November.
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Citations

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Cited by:
  1. Fagiolo G. & Treibich T.G. & Roventini A. & Napoletano M. & Dosi G., 2014. "Fiscal and monetary policies in complex evolving economies," Research Memorandum 006, Maastricht University, Graduate School of Business and Economics (GSBE).
  2. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p6go0e900 is not listed on IDEAS
  3. Noritaka Kudoh & Hong Thang Nguyen, 2011. "Taylor rules and the effects of debt-financed fiscal policy in a monetary growth model," Economics Bulletin, AccessEcon, vol. 31(3), pages 2480-2490.

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