Designing monetary and Fiscal policy rules in a New Keynesian model with rule-of-thumb consumers
AbstractThis paper develops a small New Keynesian model augmented with a steady state level of public debt and a share of rule-of-thumb consumers (ROTC henceforth) as in Gali' et al. (2004; 2007). The paper focuses on the consequences for the design of monetary and fiscal rules, of the bifurcation generated by the presence of ROTC on the demand side of the economy, in the absence of Ricardian equivalence. We find that, when fiscal policy follows a balanced budget rule, the amount of ROTC determines whether an active and/or a passive monetary policy in the sense of Leeper (1991) guarantees determinacy. When short run public debt assets are introduced, the amount of ROTC determines whether equilibrium determinacy requires a mix of active (passive) monetary policy and a passive (active) fiscal policy or a mix where policies are both active or passive. This set of equilibria has the potential to explain the empirical evidence on the U.S. postwar data on monetary and fiscal policy interactions.
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Bibliographic InfoPaper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 174.
Length: 51 pages
Date of creation: Nov 2009
Date of revision: Nov 2009
Rule-of-thumb consumers; monetary-?scal iteractions; balanced budget rule; Taylor principle; active-passive policy mix;
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-11-14 (All new papers)
- NEP-CBA-2009-11-14 (Central Banking)
- NEP-MON-2009-11-14 (Monetary Economics)
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