IDEAS home Printed from https://ideas.repec.org/a/eee/matsoc/v128y2024icp68-89.html
   My bibliography  Save this article

Taylor and fiscal rules: When do they stabilize the economy?

Author

Listed:
  • Magris, Francesco
  • Onori, Daria

Abstract

We consider a New Keynesian model with nominal rigidities and fractional cash in-advance constraint on consumption expenditures. We study the stability properties of the model when Taylor rules react either to current inflation or to expected one. We account for different public sector budget identities and different fiscal policies ensuring Government solvency. Under an independent Central Bank, forward-looking Taylor rules promote sunspot fluctuations more easily than contemporaneous ones because they set in motion a mechanism of self-fulfilling prophecies. Conversely, the introduction of capital as an asset alongside public securities facilitates smoothing behavior and reduces the region of indeterminacy but brings out multiple steady states. When public sector budget identities are consolidated, the stabilization of total public liabilities reduces the likelihood of sunspot fluctuations and even rules them out in the presence of capital accumulation. Finally, we perform a complete welfare analysis allowing to rank equilibria and to identify the best policy mix to implement Pareto-superior outcomes.

Suggested Citation

  • Magris, Francesco & Onori, Daria, 2024. "Taylor and fiscal rules: When do they stabilize the economy?," Mathematical Social Sciences, Elsevier, vol. 128(C), pages 68-89.
    • Handle: RePEc:eee:matsoc:v:128:y:2024:i:c:p:68-89
    DOI: 10.1016/j.mathsocsci.2024.01.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165489624000131
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.mathsocsci.2024.01.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:matsoc:v:128:y:2024:i:c:p:68-89. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505565 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.