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Fiscal and Monetary Policy Interaction: a simulation based analysis of a two-country New Keynesian DSGE model with heterogeneous households

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  • Marcos Valli
  • Fabia A. de Carvalho

Abstract

This paper models a fiscal policy that pursues primary balance targets to stabilize the debt-to-GDP ratio in an open and heterogeneous economy where firms combine public and private capital to produce their goods. The model extends the European NAWM presented in Coenen et. al. (2008) and Christoffel et. al. (2008) by broadening the scope for fiscal policy implementation and allowing for heterogeneity in labor skills. The domestic economy is also assumed to follow a forward looking Taylor-rule consistent with an inflation targeting regime. We correct the NAWM specification of the final-goods price indices, the recursive representation of the wage setting rule, and the wage distortion index. We calibrate the model for Brazil to analyze some implications of monetary and fiscal policy interaction and explore some of the implications of fiscal policy in this class of DSGE models.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps204.pdf
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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 204.

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Date of creation: Apr 2010
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Handle: RePEc:bcb:wpaper:204

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Web page: http://www.bcb.gov.br/?english

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  1. Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Optimal Simple and Implementable Monetary and Fiscal Rules: Expanded Version," NBER Working Papers 12402, National Bureau of Economic Research, Inc.
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