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Monetary Policy and Fiscal Rules

  • Annicchiarico Barbara

    ()

    (University of Rome ‘Tor Vergata’)

  • Marini Giancarlo

    ()

    (University of Rome ‘Tor Vergata’)

  • Piergallini Alessandro

    ()

    (University of Rome ‘Tor Vergata’ and CeFiMS, SOAS, University of London)

This paper presents a Dynamic New Keynesian model with wealth effects to study the performance of monetary policy under Ricardian and non-Ricardian fiscal regimes. The model is calibrated to euro area quarterly data. The interactions between fiscal policy and interest rate rules have critical implications for equilibrium uniqueness. Within the class of Ricardian fiscal rules, active monetary policies are not necessary for equilibrium determinacy. However, monetary authorities overreacting to inflation not only improve macroeconomic performance, but also generate similar outcomes under different fiscal rules. Conversely, under non-Ricardian fiscal regimes, interest rate pegs are predicted to reduce inflation variability.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 8 (2008)
Issue (Month): 1 (February)
Pages: 1-42

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Handle: RePEc:bpj:bejmac:v:8:y:2008:i:1:n:4
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