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Is it Possible to Go Back to Ad Hoc Macroeconomic Models? The Case of the Romer- Taylor Model

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  • Alejandro Rodríguez

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    (Department of Economics, Universidad Iberoamericana, Mexico City. Mexico)

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    Abstract

    In absence of fiscal stabilizing rules, the original Romer-Taylor model is unstable in the issuing of government bonds. Adding a wealth effect to the consumption function seems reasonable to provide rationality to the consumers, but that destabilize even more the Romer-Taylor’s framework. A fiscal stabilizing rule, where there is a tax on the wealth effect for consumers, may stabilize output, inflation and the government budget constraint in the long run. In this context, the renewed Romer-Taylor model constitutes a good instrument to provide policy prescriptions.

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    Paper provided by Universidad Iberoamericana, Department of Economics in its series Working Papers with number 0312.

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    Date of creation: 2012
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    Handle: RePEc:uic:wpaper:0312

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    1. Olivier J. Blanchard, 2008. "The State of Macro," NBER Working Papers 14259, National Bureau of Economic Research, Inc.
    2. McCallum, Bennett T & Nelson, Edward, 1999. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 296-316, August.
    3. Robert G. King, 1993. "Will the New Keynesian Macroeconomics Resurrect the IS-LM Model?," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 67-82, Winter.
    4. Laidler, David, 2006. "Woodford and Wicksell on Interest and Prices: The Place of the Pure Credit Economy in the Theory of Monetary Policy," Journal of the History of Economic Thought, Cambridge University Press, vol. 28(02), pages 151-159, June.
    5. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
    6. John B. Taylor, 2000. "Teaching Modern Macroeconomics at the Principles Level," American Economic Review, American Economic Association, vol. 90(2), pages 90-94, May.
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