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Fiscal policy in a monetary economy with capital and finite lifetime

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

Abstract

This paper develops a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite lifetimes. The 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. When calibrated to euro area quarterly data, the model predicts that fiscal expansions generate a tradeoff in output dynamics between short-term gains and medium-term losses. It is also 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. JEL Classification: E52, E58, E63

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0661.

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Date of creation: Jul 2006
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Handle: RePEc:ecb:ecbwps:20060661

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Keywords: Capital Accumulation; Finite Lifetime; Fiscal Policy; monetary policy; nominal rigidities; Simulations;

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Cited by:
  1. Leith, Campbell & von Thadden, Leopold, 2006. "Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers," Discussion Paper Series 1: Economic Studies 2006,21, Deutsche Bundesbank, Research Centre.
  2. Alexander W. Richter, 2013. "The Fiscal Limit and Non-Ricardian Consumers," Auburn Economics Working Paper Series auwp2013-19, Department of Economics, Auburn University.
  3. Barbara Annicchiarico & Fabio Di Dio & Francesco Felici & Francesco Nucci, . "Macroeconomic Modelling and the Effects of Policy Reforms: an Assessment for Italy using ITEM and," Working Papers 1, Department of the Treasury, Ministry of the Economy and of Finance.
  4. Rym Aloui & Michel Guillard, 2009. "A Simple “Public Debt-Deflation” Theory: Leeper revisited," Documents de recherche 09-11, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.

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