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An analytical approach to new Keynesian models under the fiscal theory

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  • Tan, Fei

Abstract

This article illustrates a widely applicable frequency-domain methodology to solving multivariate linear rational expectations models. As an example, we solve a prototypical new Keynesian model under the assumption that primary surpluses evolve independently of government liabilities, a regime in which the fiscal theory of the price level is valid. The resulting analytical solution is useful in characterizing the cross-equation restrictions and illustrating the complex interaction between the fiscal theory and price rigidity. We also highlight some useful by-products of such method which are not easily obtainable for more sophisticated models using time-domain methods.

Suggested Citation

  • Tan, Fei, 2017. "An analytical approach to new Keynesian models under the fiscal theory," Economics Letters, Elsevier, vol. 156(C), pages 133-137.
    • Handle: RePEc:eee:ecolet:v:156:y:2017:i:c:p:133-137
    DOI: 10.1016/j.econlet.2017.05.001
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    References listed on IDEAS

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    1. Nigel McClung, 2021. "The Power of Forward Guidance and the Fiscal Theory of the Price Level," International Journal of Central Banking, International Journal of Central Banking, vol. 17(71), pages 1-57, December.
    2. Tan, Fei, 2018. "A Frequency-Domain Approach to Dynamic Macroeconomic Models," MPRA Paper 90487, University Library of Munich, Germany.

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    JEL classification:

    • C65 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Miscellaneous Mathematical Tools
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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