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Achieving a Soft Landing

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  • Daniel Leigh
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    Abstract

    This paper utilizes an open-economy New Keynesian overlapping generations model to assess the extent to which fiscal policy, along side an inflation-forecast-based monetary policy, could enhance macroeconomic stability in Colombia. The model simulations indicate that, in addition to stabilizing output and inflation, a stronger response of the fiscal balance to excess tax revenue would reduce the burden on the central bank of adjusting interest rates, lessen the associated degree of exchange rate volatility, and contribute to a more stable external current account balance. The analysis also assesses how the success of fiscal policy in enhancing macroeconomic stability depends on the type of shock, the response of monetary policy, and the length of fiscal policy implementation lags.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/69.

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    Length: 23
    Date of creation: 01 Mar 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/69

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    Related research

    Keywords: Fiscal policy; Monetary policy; Tax revenues; inflation; fiscal balance; aggregate demand; tax revenue; fiscal policy response; macroeconomic stability; fiscal consolidation; nominal interest rate; fiscal response; fiscal tightening; fiscal deficit; government spending; inflation rate; inflation response; fiscal rule; increase in consumption; inflation targeting; fiscal surplus; tax rates; fiscal shocks; fiscal multipliers; foreign currency; cyclical fiscal policy; fiscal adjustment; tax changes; fiscal contractions; tax base; fiscal contraction; tax increases; inflation target; relative price; real interest rate; fiscal space; fiscal policy rule; tax income; tax multiplier; increase in inflation; fiscal position; capital expenditure; inflationary consequences; structural fiscal; tax reductions; government spending shocks; inflationary pressures; tax cuts; forecasting inflation; fiscal loosening; fiscal revenue;

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    References

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    1. Frederic S. Mishkin, 2007. "Will Monetary Policy Become More of a Science?," NBER Working Papers 13566, National Bureau of Economic Research, Inc.
    2. Martha Rosalba Lopezpiñeros, 2004. "Efficient Policy Rulefor Inflation Targeting Incolombia," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
    3. Bayoumi, Tamim & Sgherri, Silvia, 2006. "Mr Ricardo's Great Adventure: Estimating Fiscal Multipliers in a Truly Intertemporal Model," CEPR Discussion Papers 5839, C.E.P.R. Discussion Papers.
    4. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," NBER Working Papers 13580, National Bureau of Economic Research, Inc.
    5. Peter Rowland & José Luis Torres, . "Determinants of Spread and Creditworthiness for Emerging Market Sovereign Debt:A Panel Data Study," Borradores de Economia 295, Banco de la Republica de Colombia.
    6. Giavazzi, Francesco & Pagano, Marco, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," CEPR Discussion Papers 417, C.E.P.R. Discussion Papers.
    7. Douglas Laxton & Michael Kumhof, 2007. "A Party without a Hangover? On the Effects of U.S. Government Deficits," 2007 Meeting Papers 676, Society for Economic Dynamics.
    8. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    9. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
    10. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
    11. Pär Österholm & Lisandro Abrego, 2008. "External Linkages and Economic Growth in Colombia," IMF Working Papers 08/46, International Monetary Fund.
    12. Javier Gómez & José Darío Uribe & Hernando Vargas, 2002. "The Implementation Of Inflation Targeting In Colombia," BORRADORES DE ECONOMIA 003603, BANCO DE LA REPÚBLICA.
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    Cited by:
    1. Ramiro Rodríguez Revilla, 2011. "Modelos de equilibrio general dinámicos y estocásticos para Colombia 1995-2011," REVISTA ECOS DE ECONOMÍA, UNIVERSIDAD EAFIT.

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