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Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation

Listed author(s):
  • Giorgio Motta

    ()

  • Patrizio Tirelli

    ()

When the central bank is the sole policymaker, the combination of limited asset market participation and consumption habits can have dramatic implications for the optimal monetary policy rule and for stability properties of a business cycle model characterized by price and nominal wage rigidities. In this framework, a simple countercyclical fiscal rule plays a twofold role. On the one hand it ensures uniqueness of the rational expectations equilibrium when monetary policy follows a standard Taylor rule. On the other hand it brings aggregate dynamics substantially closer to their socially efficient levels.

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File URL: http://dems.unimib.it/repec/pdf/mibwpaper204.pdf
File Function: First version, 2011
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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 204.

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Length: 31 pages
Date of creation: Mar 2011
Date of revision: Mar 2011
Handle: RePEc:mib:wpaper:204
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