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Fiscal Policy under Balanced Budget and Indeterminacy: A New Keynesian Perspective

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  • Giovanni Di Bartolomeo

    ()
    (University of Teramo)

  • 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

Paper provided by University of Crete, Department of Economics in its series Working Papers with number 0803.

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Length: 26 pages
Date of creation: 15 Feb 2008
Date of revision:
Handle: RePEc:crt:wpaper:0803

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Keywords: Rule-of-thumb consumers; equilibrium determinacy; fiscal and monetary policy inter-actions; tax distortions; balanced government budget.;

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References

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Cited by:
  1. Manzo Marco & Monteduro Maria Teresa, 2011. "From IRAP to CBIT: Tax distortions and redistributive effects," wp.comunite 0084, Department of Communication, University of Teramo.

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