IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Fiscal and Monetary policy Interactions in a New Keynesian Model with Liquidity Constraints

  • V. Anton Muscatelli
  • Patrizio Tirelli
  • Carmine Trescroci

This paper derives a NewKeynesiandynamic general equilibrium model with liquidity constrained consumers and sticky prices. The model allows a role for both government spending and taxation in the DGE model. The mode lis then estimated using US data. We demonstrate that there seems to be a significant role for rule-of-thumb consumer behaviour. Our model is then used to analyse the interaction between Fiscal and monetary policies. We examine the extent to which fiscal policy (automatic stabilisers) assist or hinder monetary policy when the latter takes a standard forward-looking inflation targetingf orm. We also examine the extent to which inertia in fiscal policy and the presence of rule-of-thumb consumers aspects output and inflation variability in the presence of such a monetary policy rule..

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2005_19.

in new window

Date of creation: Oct 2003
Date of revision: Apr 2005
Handle: RePEc:gla:glaewp:2005_19
Contact details of provider: Postal: Adam Smith Building, Glasgow G12 8RT
Phone: 0141 330 4618
Fax: 0141 330 4940
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Campbell Leith & Jim Malley, 2002. "Estimated General Equilibrium Models for the Evaluation of Monetary Policy in the US and Europe," CESifo Working Paper Series 699, CESifo Group Munich.
  2. Argia M. Sbordone, 2001. "Prices and Unit Labor Costs: A New Test of Price Stickiness," Departmental Working Papers 200112, Rutgers University, Department of Economics.
  3. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  4. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," NBER Working Papers 9420, National Bureau of Economic Research, Inc.
  5. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc.
  6. Mountford, Andrew & Uhlig, Harald, 2002. "What are the Effects of Fiscal Policy Shocks?," CEPR Discussion Papers 3338, C.E.P.R. Discussion Papers.
  7. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
  8. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 1-55.
  9. Schmitt-Grohé, Stephanie & Uribe, Martín, 2001. "Optimal Fiscal and Monetary Policy Under Sticky Prices," CEPR Discussion Papers 2942, C.E.P.R. Discussion Papers.
  10. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer.
  11. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  12. Carroll, Christopher D., 2000. "Solving consumption models with multiplicative habits," Economics Letters, Elsevier, vol. 68(1), pages 67-77, July.
  13. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2002. "Monetary and Fiscal Policy Interactions over the Cycle: Some Empirical Evidence," CESifo Working Paper Series 817, CESifo Group Munich.
  14. Shapiro, Matthew D & Slemrod, Joel, 1995. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," American Economic Review, American Economic Association, vol. 85(1), pages 274-83, March.
  15. Patrizio Tirelli & V. Anton Muscatelli & Carmine Trecroci, 2004. "The interaction of fiscal and monetary policies: some evidence using structural econometric models'," Money Macro and Finance (MMF) Research Group Conference 2003 103, Money Macro and Finance Research Group.
  16. repec:fth:harver:1435 is not listed on IDEAS
  17. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
  18. Jordi Gali & Mark Gertler & J. David Lopez-Salido, 2001. "European Inflation Dynamics," NBER Working Papers 8218, National Bureau of Economic Research, Inc.
  19. John Bailey Jones, 1999. "Has Fiscal Policy Helped Stabilize the Postwar U.S. Economy?," Discussion Papers 99-03, University at Albany, SUNY, Department of Economics.
  20. Rafael Domenech & Javier Andres, 2005. "Fiscal Rules and Macroeconomic Stability," Working Papers 0501, International Economics Institute, University of Valencia, revised Nov 2005.
  21. Favero, Carlo A. & Monacelli, Tommaso, 2003. "Monetary-Fiscal Mix and Inflation Performance: Evidence from the US," CEPR Discussion Papers 3887, C.E.P.R. Discussion Papers.
  22. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  23. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: I. General Theory," NBER Working Papers 9419, National Bureau of Economic Research, Inc.
  24. Kara, Amit & Nelson, Edward, 2003. "The Exchange Rate and Inflation in the UK," CEPR Discussion Papers 3783, C.E.P.R. Discussion Papers.
  25. Melitz, Jacques, 1997. "Some Cross-Country Evidence about Debt, Deficits and the Behaviour of Monetary and Fiscal Authorities," CEPR Discussion Papers 1653, C.E.P.R. Discussion Papers.
  26. Javier J. Pérez & Paul Hiebert, 2002. "Identifying endogenous fiscal policy rules for macroeconomic models," Economic Working Papers at Centro de Estudios Andaluces E2002/06, Centro de Estudios Andaluces.
  27. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999 1151, Society for Computational Economics.
  28. N. Gregory Mankiw, 2000. "The Savers-Spenders Theory of Fiscal Policy," NBER Working Papers 7571, National Bureau of Economic Research, Inc.
  29. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  30. Leith, Campbell & Wren-Lewis, Simon, 2000. "Interactions between Monetary and Fiscal Policy Rules," Economic Journal, Royal Economic Society, vol. 110(462), pages C93-108, March.
  31. Zagaglia, Paolo, 2002. "On (Sub) Optimal Monetary Policy Rules under Untied Fiscal Hands," Research Papers in Economics 2002:17, Stockholm University, Department of Economics.
  32. Alex Cukierman & V. Anton Muscatelli, 2002. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability? - Theory and Evidence," CESifo Working Paper Series 764, CESifo Group Munich.
  33. Dixit, Avinash & Lambertini, Luisa, 2001. "Monetary-fiscal policy interactions and commitment versus discretion in a monetary union," European Economic Review, Elsevier, vol. 45(4-6), pages 977-987, May.
  34. Alex Cukierman & Anton Muscatelli, 2001. "Do Central Banks have Precautionary Demands for Expansions and for Price Stability?," Working Papers 2002_4, Business School - Economics, University of Glasgow, revised Mar 2002.
  35. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
  36. David B. Gordon & Eric M. Leeper, 2005. "Are Countercyclical Fiscal Policies Counterproductive?," NBER Working Papers 11869, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:gla:glaewp:2005_19. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jeanette Findlay)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.