Advanced Search
MyIDEAS: Login to save this paper or follow this series

Effects of the supply-side channel on stabilisation properties of policy rules

Contents:

Author Info

  • Railavo, Jukka

    ()
    (Bank of Finland Research)

Registered author(s):

    Abstract

    In this paper we introduce an application of the supply-side channel for fiscal policy to the basic New Keynesian model. We use a proportional tax rate instead of lump sum tax and introduce the distortions of a tax wedge. We derive a closed economy forward-looking model with government consumption and no capital. Households’ labour supply decisions are endogenised. Monetary policy is conducted by a Taylor-type interest rate rule and fiscal policy follows a simple debt rule. We analyse the stability of the model when fiscal policy has both demand and supply-side effects and compare results with the standard case of only demand effects. We show that taking supply-side effects into account restricts the fiscal policy parameter range consistent with the dynamic stability of the economy. We also argue that allowing fiscal policy to affect both supply and demand results in more persistent inflation as well as output responses to shocks, than without the supply-side channel. We also discuss the different monetary and fiscal policy regimes and their implication on the stability of inflation and output.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0334.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 34/2003.

    as in new window
    Length: 49 pages
    Date of creation: 16 Oct 2003
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2003_034

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
    More information through EDIRC

    Related research

    Keywords: inflation; fiscal and monetary policy; stabilisation;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Harald Uhlig, 1995. "A toolkit for analyzing nonlinear dynamic stochastic models easily," Discussion Paper / Institute for Empirical Macroeconomics 101, Federal Reserve Bank of Minneapolis.
    2. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Optimal Fiscal and Monetary Policy Under Sticky Prices," NBER Working Papers 9220, National Bureau of Economic Research, Inc.
    3. Evans, G W & Honkapohja, Seppo, 2002. "Policy Interaction, Learning and the Fiscal Theory of Prices," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3564, C.E.P.R. Discussion Papers.
    4. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
    5. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2139, C.E.P.R. Discussion Papers.
    6. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, Econometric Society, vol. 48(5), pages 1305-11, July.
    7. Michael Woodford, 1999. "Optimal monetary policy inertia," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
    8. Bullard, James & Mitra, Kaushik, 2002. "Learning about monetary policy rules," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(6), pages 1105-1129, September.
    9. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(3), pages 573-601, June.
    10. Leong , Kenneth, 2002. "Reconciling the New Keynesian model with observed persistence," Research Discussion Papers, Bank of Finland 19/2002, Bank of Finland.
    11. Leith, Campbell & Simon Wren-Lewis, 2003. "Interactions Between Monetary and Fiscal Policy Under Flexible Exchange Rates," Royal Economic Society Annual Conference 2003, Royal Economic Society 134, Royal Economic Society.
    12. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
    13. Dotsey, Michael, 1994. "Some unpleasant supply side arithmetic," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(3), pages 507-524, June.
    14. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
    15. Pohjola, Tapio, 2002. "Effects of fiscal policy on the durability of low inflation regimes," Research Discussion Papers, Bank of Finland 14/2002, Bank of Finland.
    16. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier.
    17. Benhabib, J. & Schmitt-Grohe, S. & Uribe, M., 1998. "Monetary Policy and Multiple Equilibria," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-02, C.V. Starr Center for Applied Economics, New York University.
    18. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, Springer, vol. 4(3), pages 381-99.
    19. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 27(1), pages 129-147, February.
    20. Michael Woodford, 1996. "Control of the Public Debt: A Requirement for Price Stability?," NBER Working Papers 5684, National Bureau of Economic Research, Inc.
    21. Leith, Campbell & Wren-Lewis, Simon, 2000. "Interactions between Monetary and Fiscal Policy Rules," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 110(462), pages C93-108, March.
    22. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall.
    23. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
    24. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
    25. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 33(3), pages 669-728, August.
    26. Javier Andr�s & Fernando Ballabriga & Javier Vall�s, 2002. "Non-Ricardian fiscal policies in an open monetary union," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 169, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    27. Rotemberg, Julio J, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 49(4), pages 517-31, October.
    28. Rochelle M. Edge & Jeremy B. Rudd, 2002. "Taxation and the Taylor principle," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-51, Board of Governors of the Federal Reserve System (U.S.).
    29. Ludvigson, Sydney, 1996. "The macroeconomic effects of government debt in a stochastic growth model," Journal of Monetary Economics, Elsevier, Elsevier, vol. 38(1), pages 25-45, August.
    30. Kortelainen, Mika, 2002. "EDGE: a model of the euro area with applications to monetary policy," Scientific Monographs, Bank of Finland E:23/2002, Bank of Finland.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Jukka Railavo, 2005. "Monetary Concequences of Alternative Fiscal Policy Rules," Computing in Economics and Finance 2005, Society for Computational Economics 145, Society for Computational Economics.
    2. Railavo, Jukka, 2004. "Monetary consequences of alternative fiscal policy rules," Research Discussion Papers, Bank of Finland 20/2004, Bank of Finland.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:hhs:bofrdp:2003_034. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.