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The Stabilizing Virtues of Fiscal vs. Monetary Policy on Endogenous Bubble Fluctuations

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Abstract

We explore the existence of endogenous fluctuations with a rational bubble and the stabilizing role of fiscal and monetary policies. Consumers' credit constraints, the role of collateral and a portfolio choice are the key ingredients of our analysis. We consider an overlapping generations model where households realize a portfolio choice between three assets with different returns (capital, money and bonds). Expectation-driven fluctuations and the multiplicity of steady states occur under a positive bubble on bonds, gross substitutability and large input substitution because of credit market imperfections. Focusing on the stabilizing role of policies, we show that a progressive taxation on capital income may rule out expectation-driven fluctuations and the multiplicity of steady states. In contrast, a monetary policy under a Taylor rule has a mitigated stabilizing role, depending on the reactiveness of the policy rule and the concavity of the utility function. When the monetary authority decides instead to fix the nominal interest rate regardless the inflation, decreasing the level of the nominal interest rate can rule out expectation-driven fluctuations, restore the uniqueness of steady states, but can damage the welfare at the steady state.

Suggested Citation

  • Thomas Seegmuller & Lise Clain-Chamosset-Yvrard, 2013. "The Stabilizing Virtues of Fiscal vs. Monetary Policy on Endogenous Bubble Fluctuations," AMSE Working Papers 1343, Aix-Marseille School of Economics, Marseille, France, revised 17 Aug 2013.
  • Handle: RePEc:aim:wpaimx:1343
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    References listed on IDEAS

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    1. Bosi, Stefano & Seegmuller, Thomas, 2010. "On the role of progressive taxation in a Ramsey model with heterogeneous households," Journal of Mathematical Economics, Elsevier, vol. 46(6), pages 977-996, November.
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    1. Clain-Chamosset-Yvrard, Lise & Seegmuller, Thomas, 2015. "Rational bubbles and macroeconomic fluctuations: The (de-)stabilizing role of monetary policy," Mathematical Social Sciences, Elsevier, vol. 75(C), pages 1-15.

    More about this item

    Keywords

    Indeterminacy; Rational bubble; Cash-in-advance constraint; Collateral; Progressive taxation; Monetary policy.;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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