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

Author

Listed:
  • Noritaka Kudoh

    () (Hokkaido University)

  • Hong Thang Nguyen

    () (Hokkaido University)

Abstract

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.

Suggested Citation

  • Noritaka Kudoh & Hong Thang Nguyen, 2011. "Taylor rules and the effects of debt-financed fiscal policy in a monetary growth model," Economics Bulletin, AccessEcon, vol. 31(3), pages 2480-2490.
  • Handle: RePEc:ebl:ecbull:eb-11-00328
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2011/Volume31/EB-11-V31-I3-P222.pdf
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    References listed on IDEAS

    as
    1. Stacey L. Schreft & Bruce D. Smith, 1998. "The Effects of Open Market Operations in a Model of Intermediation and Growth," Review of Economic Studies, Oxford University Press, vol. 65(3), pages 519-550.
    2. Ascari, Guido & Rankin, Neil, 2013. "The effectiveness of government debt for demand management: Sensitivity to monetary policy rules," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1544-1566.
    3. 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.
    4. Andreas Schabert, 2004. "Interactions of monetary and fiscal policy via open market operations," Economic Journal, Royal Economic Society, vol. 114(494), pages 186-206, March.
    5. 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.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Taylor rules; budget deficits; overlapping generations.;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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