Taylor Rules Cause Fiscal Policy Ineffectiveness
AbstractWith the aim of constructing a dynamic general equilibrium model where fiscal policy can operate as a demand management tool, we develop a framework which combines staggered prices and overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make tax cuts, financed by increasing government debt, effective in raising short-run output. Surprisingly, in our baseline model this fails to occur. We trace the cause to the assumption that monetary policy is governed by a Taylor Rule. If monetary policy is instead governed by a money supply rule, fiscal policy effectiveness is restored.
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Bibliographic InfoPaper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0707.
Date of creation: Nov 2007
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staggered prices; overlapping generations; fiscal policy effectiveness; Taylor Rules.;
Find related papers by JEL classification:
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-05 (All new papers)
- NEP-CBA-2008-01-05 (Central Banking)
- NEP-DGE-2008-01-05 (Dynamic General Equilibrium)
- NEP-MAC-2008-01-05 (Macroeconomics)
- NEP-MON-2008-01-05 (Monetary Economics)
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- Annicchiarico, Barbara & Giammarioli, Nicola & Piergallini, Alessandro, 2009.
"Budgetary Policies in a DSGE Model with Finite Horizons,"
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- Stork Zbynek, 2011. "A DSGE model of the Czech economy: a Ministry of Finance approach," EcoMod2011 3007, EcoMod.
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