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A Fiscal Stimulus with Deep Habits and Optimal Monetary Policy

Author

Listed:
  • Cristiano Cantore

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

  • Giovanni Melina

    (University of Surrey)

  • Bo Yang

    (University of Surrey)

Abstract

A New-Keynesian model with deep habits and optimal monetary policy delivers a fiscal multiplier above one and the crowding-in effect on private consumption obtainable in a Real Business Cycle model à la Ravn et al. (2006). Optimized Taylor-type or price-level interest rate rules yield results close to optimal policy and dominate a conventional Taylor interest rate rule. Private consumption is crowded out only if the Taylor rule is sub-optimal and then negates the fiscal stimulus by responding strongly to the output gap, or if the ability to commit is absent. At the zero lower bound private consumption is always crowded in across simple rules.

Suggested Citation

  • Cristiano Cantore & Paul Levine & Giovanni Melina & Bo Yang, 2012. "A Fiscal Stimulus with Deep Habits and Optimal Monetary Policy," School of Economics Discussion Papers 0512, School of Economics, University of Surrey.
    • Handle: RePEc:sur:surrec:0512
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    References listed on IDEAS

    as
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    Cited by:

    1. Mr. Alessandro Cantelmo & Mr. Giovanni Melina, 2017. "Sectoral Labor Mobility and Optimal Monetary Policy," IMF Working Papers 2017/040, International Monetary Fund.
    2. Cristiano Cantore & Paul Levine & Giovanni Melina, 2014. "Deep versus superficial habit: It’s all in the persistence," School of Economics Discussion Papers 0714, School of Economics, University of Surrey.
    3. Punnoose Jacob, 2015. "Deep Habits, Price Rigidities, and the Consumption Response to Government Spending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(2-3), pages 481-510, March.
    4. Marco Riguzzi & Philipp Wegmueller, 2017. "Economic Openness and Fiscal Multipliers," International Economic Journal, Taylor & Francis Journals, vol. 31(1), pages 1-35, January.
    5. Giovanni Melina & Stefania Villa, 2014. "Fiscal Policy And Lending Relationships," Economic Inquiry, Western Economic Association International, vol. 52(2), pages 696-712, April.
    6. Cristiano Cantore & Paul Levine & Giovanni Melina, 2014. "A Fiscal Stimulus and Jobless Recovery," Scandinavian Journal of Economics, Wiley Blackwell, vol. 116(3), pages 669-701, July.

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    More about this item

    Keywords

    Deep habits; Optimal monetary policy; Price-level rule; Zero lower bound;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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