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Budgetary policies in a DSGE model with finite horizons

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  • Annicchiarico, Barbara
  • Giammarioli, Nicola
  • Piergallini, Alessandro

Abstract

This paper presents a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite horizons. Our New Keynesian framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. The model predicts that fiscal expansions generate a trade-off in output dynamics between short-term gains and medium-term losses. It is shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization.

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Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 66 (2012)
Issue (Month): 2 ()
Pages: 111-130

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Handle: RePEc:eee:reecon:v:66:y:2012:i:2:p:111-130
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622941

Keywords: Fiscal policy; Monetary policy; Nominal rigidities; Capital accumulation; Finite horizons; Simulations;

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Find related papers by JEL classification:
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
  • 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

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Cited by:

  1. Alexander W. Richter, 2013. "The Fiscal Limit and Non-Ricardian Consumers," Auburn Economics Working Paper Series auwp2013-19, Department of Economics, Auburn University.
  2. Ambriško, Róbert & Babecký, Jan & Ryšánek, Jakub & Valenta, Vilém, 2015. "Assessing the impact of fiscal measures on the Czech economy," Economic Modelling, Elsevier, vol. 44(C), pages 350-357.
  3. Michael Devereux, 2010. "Fiscal Deficits, Debt, and Monetary Policy in a Liquidity Trap," Working Papers Central Bank of Chile 581, Central Bank of Chile.
  4. Eddie Gerba & Klemens Hauzenberger, 2013. "Estimating US Fiscal and Monetary Interactions in a Time Varying VAR," Studies in Economics 1303, School of Economics, University of Kent.

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