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Automatic Stabilizers and Monetary Rules in a Ricardian Economy

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  • Domenech, Rafael

    (Universidad De Valencia)

  • Javier Andres

Abstract

This paper analyses the effect of the fiscal structure upon the trade-off between inflation and output stabilization in presence of technological shocks in a DGE model with nominal inertia. The model is calibrated to reproduce the main features of European economies and it integrates a rich menu of fiscal variables as well as a target on the debt to output ratio. The main finding is that taxes linked to economic activity worsen the output-inflation variability trade-off as compared with an economy with lump-sum taxes, except when nominal and real rigidities are very large. Aside from the well known supply side channels that explain this result, we find that fiscal rules designed to ensure debt consolidation induce cyclical movements in aggregate demand that also contribute to increase the volatility of output in presence of distortionary taxes.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 66.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:66

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Keywords: fiscal rules; macroeconomic stability; distortionary taxes;

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Cited by:
  1. Canova, Fabio & Pappa, Evi, 2006. "The elusive costs and the immaterial gains of fiscal constraints," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1391-1414, September.

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