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Government Spending and the Taylor Principle

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  • Gisle James Natvik

    ()
    (University of Oslo and Norges Bank (Central Bank of Norway))

Abstract

This paper explores how government size affects the scope for equilibrium indeterminacy in a New Keynesian economy where part of the population live hand-to-mouth. I find that in this framework, a larger public sector may widen the scope for self-fulfilling prophecies to occur. This takes place even though taxes serve to reduce swings in current income. In general, government provision of goods that are Edgeworth substitutes for private consumption tend to narrow the scope for indeterminacy, while government goods that are Edgeworth complements for private consumption increase the problem of indeterminacy. Hence monetary policy should be conducted with an eye to the amount and composition of government consumption.

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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2006/11.

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Length: 41 pages
Date of creation: 11 Dec 2006
Date of revision:
Handle: RePEc:bno:worpap:2006_11

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Keywords: Public expenditures; Taylor principle; Fiscal policy rules; Rule- of-thumb consumers.;

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References

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  1. Evans, Paul & Karras, Georgios, 1998. "Liquidity Constraints and the Substitutability between Private and Government Consumption: The Role of Military and Non-military Spending," Economic Inquiry, Western Economic Association International, vol. 36(2), pages 203-14, April.
  2. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
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  7. Florin O. Bilbie, 2005. "Limited Asset Markets Participation, Monetary Policy and (Inverted) Keynesian Logic," Economics Series Working Papers 2005-W09, University of Oxford, Department of Economics.
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  10. John Bailey Jones, 1999. "Has Fiscal Policy Helped Stabilize the Postwar U.S. Economy?," Discussion Papers 99-03, University at Albany, SUNY, Department of Economics.
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  15. Roisland, Oistein, 2003. "Capital income taxation, equilibrium determinacy, and the Taylor principle," Economics Letters, Elsevier, vol. 81(2), pages 147-153, November.
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  17. Karras, Georgios, 1994. "Government Spending and Private Consumption: Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 9-22, February.
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  23. repec:fth:harver:1435 is not listed on IDEAS
  24. Sveen, Tommy & Weinke, Lutz, 2005. "New perspectives on capital, sticky prices, and the Taylor principle," Journal of Economic Theory, Elsevier, vol. 123(1), pages 21-39, July.
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Citations

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Cited by:
  1. Francesco Furlanetto & Gisle J. Natvik & Martin Seneca, 2011. "Investment shocks and macroeconomic co-movement," Working Paper 2011/14, Norges Bank.
  2. Francesco Furlanetto & Martin Seneca, 2007. "Rule-of-thumb consumers, productivity and hours," Working Paper 2007/05, Norges Bank.

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