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Optimal choice of fiscal policy instruments in a stochastic IS–LM model

Listed author(s):
  • Correani, L.
  • Di Dio, F.
  • Patrì, S.

This article derives optimal fiscal rules within a stochastic model of Keynesian type in the context of Poole (1970). By using optimal control theory and applying the Hamilton–Jacobi–Bellman equation, we extend the original Poole results concerning the output stabilization properties of monetary policy to the case of fiscal policy. In particular, we look for the optimal setting of government expenditure and lump-sum taxation in the case that the fiscal authority wishes to keep the product close to a reference value and that the economy is assumed to be affected by stochastic disturbances of real and/or monetary type. According to our findings an expenditure rule is preferable to a taxation rule when the two instruments are independent. The introduction of a fiscal budget rule can make taxation preferable under a certain model parametrization.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165489614000389
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Article provided by Elsevier in its journal Mathematical Social Sciences.

Volume (Year): 71 (2014)
Issue (Month): C ()
Pages: 30-42

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Handle: RePEc:eee:matsoc:v:71:y:2014:i:c:p:30-42
DOI: 10.1016/j.mathsocsci.2014.04.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505565

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  7. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
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  9. Dixon, Huw & Lawler, Phillip, 1996. " Imperfect Competition and the Fiscal Multiplier," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(2), pages 219-231, June.
  10. Collard, Fabrice & Dellas, Harris, 2005. "Poole in the New Keynesian model," European Economic Review, Elsevier, vol. 49(4), pages 887-907, May.
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  12. Chari, V V & Christiano, Lawrence J & Kehoe, Patrick J, 1991. "Optimal Fiscal and Monetary Policy: Some Recent Results," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(3), pages 519-539, August.
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  15. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
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