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Taylor rules and the effects of debt-financed fiscal policy in a monetary growth model

  • Noritaka Kudoh

    ()

    (Hokkaido University)

  • Hong Thang Nguyen

    ()

    (Hokkaido University)

We explore the long-run implications of adopting a Taylor-type interest-rate rule in a simple monetary growth model in which budget deficits are financed partly by unbacked government debt. Because monetary policy is accommodative only when it is passive, the Taylor principle, which requires monetary policy to be active, itself generates a negative relationship between output and inflation. As a result, a permanent increase in government consumption becomes contractionary. Thus, policy makers face a choice between implementing an activist fiscal policy and following the Taylor principle.

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File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I3-P222.pdf
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Article provided by AccessEcon in its journal Economics Bulletin.

Volume (Year): 31 (2011)
Issue (Month): 3 ()
Pages: 2480-2490

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Handle: RePEc:ebl:ecbull:eb-11-00328
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  1. Guido Ascari & Neil Rankin, 2010. "The Effectiveness of Government Debt for Demand Management: Sensitivity to Monetary Policy Rules," Quaderni di Dipartimento 133, University of Pavia, Department of Economics and Quantitative Methods.
  2. Andreas Schabert, 2004. "Interactions of monetary and fiscal policy via open market operations," Economic Journal, Royal Economic Society, vol. 114(494), pages C186-C206, 03.
  3. Stacey L. Schreft & Bruce D. Smith, 1997. "The effects of open market operations in a model of intermediation and growth," Research Working Paper 97-03, Federal Reserve Bank of Kansas City.
  4. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
  5. Kudoh, Noritaka & Nguyen, Hong Thang, 2010. "Monetary Policy Rules and the Effects of Fiscal Policy," Discussion paper series. A 220, Graduate School of Economics and Business Administration, Hokkaido University.
  6. Noritaka Kudoh, 2007. "Low Nominal Interest Rates: A Public Finance Perspective," International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 61-93, June.
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