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

  • V. Anton Muscatelli

    (University of Glasgow and CESifo, Munich)

  • Tiziano Ropele

    ()

    (Department of Economics, University of Milan-Bicocca)

  • Patrizio Tirelli

    ()

    (Department of Economics, University of Milan-Bicocca)

This paper derives a New Keynesian dynamic 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 model is then estimated using Euro area 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 targeting form. We also examine the extent to which inertia in fiscal policy and the presence of rule-of-thumb consumers affects output and inflation variability in the presence of such a monetary policy rule.

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File URL: http://dems.unimib.it/repec/pdf/mibwpaper83.pdf
File Function: First version, 2004
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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 83.

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Length: 36 pages
Date of creation: Nov 2004
Date of revision: Nov 2004
Handle: RePEc:mib:wpaper:83
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  1. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  2. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 2001. "Monetary and Fiscal Policy Interactions over the Cycle: Some Empirical Evidence," Working Papers 2002_13, Business School - Economics, University of Glasgow, revised Oct 2002.
  3. Zagaglia, Paolo, 2002. "On (Sub) Optimal Monetary Policy Rules under Untied Fiscal Hands," Research Papers in Economics 2002:17, Stockholm University, Department of Economics.
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  9. 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.
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  26. 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.
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  30. 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.
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