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Automatic Stabilizers and Monetary Rules in a Ricardian Economy

Author

Listed:
  • Domenech, Rafael

    (Universidad De Valencia)

  • Javier Andres

Abstract

This paper analyses the effect of the fiscal structure upon the trade-off between inflation and output stabilization in presence of technological shocks in a DGE model with nominal inertia. The model is calibrated to reproduce the main features of European economies and it integrates a rich menu of fiscal variables as well as a target on the debt to output ratio. The main finding is that taxes linked to economic activity worsen the output-inflation variability trade-off as compared with an economy with lump-sum taxes, except when nominal and real rigidities are very large. Aside from the well known supply side channels that explain this result, we find that fiscal rules designed to ensure debt consolidation induce cyclical movements in aggregate demand that also contribute to increase the volatility of output in presence of distortionary taxes.

Suggested Citation

  • Domenech, Rafael & Javier Andres, 2003. "Automatic Stabilizers and Monetary Rules in a Ricardian Economy," Royal Economic Society Annual Conference 2003 66, Royal Economic Society.
    • Handle: RePEc:ecj:ac2003:66
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    Cited by:

    1. Canova, Fabio & Pappa, Evi, 2006. "The elusive costs and the immaterial gains of fiscal constraints," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1391-1414, September.

    More about this item

    Keywords

    fiscal rules; macroeconomic stability; distortionary taxes;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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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