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Budgetary policies in a DSGE model with finite horizons

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  • Annicchiarico, Barbara
  • Giammarioli, Nicola
  • Piergallini, Alessandro

Abstract

This paper presents a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite horizons. Our New Keynesian framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. The model predicts that fiscal expansions generate a trade-off in output dynamics between short-term gains and medium-term losses. It is shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization.

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Bibliographic Info

Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 66 (2012)
Issue (Month): 2 ()
Pages: 111-130

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Handle: RePEc:eee:reecon:v:66:y:2012:i:2:p:111-130

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Web page: http://www.elsevier.com/locate/inca/622941

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Keywords: Fiscal policy; Monetary policy; Nominal rigidities; Capital accumulation; Finite horizons; Simulations;

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References

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Cited by:
  1. Michael B. Devereux, 2011. "Fiscal Deficits, Debt, and Monetary Policy in a Liquidity Trap," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.), Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 10, pages 369-410 Central Bank of Chile.
  2. Robert Ambrisko & Jan Babecky & Jakub Rysanek & Vilem Valenta, 2012. "Assessing the Impact of Fiscal Measures on the Czech Economy," Working Papers 2012/15, Czech National Bank, Research Department.
  3. Eddie Gerba & Klemens Hauzenberger, 2013. "Estimating US Fiscal and Monetary Interactions in a Time Varying VAR," Studies in Economics 1303, Department of Economics, University of Kent.

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