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The Effectiveness of Government Debt for Demand Management: Sensitivity to Monetary Policy Rules

Author

Listed:
  • Guido Ascari

    (Department of Economics and Quantitative Methods, University of Pavia)

  • Neil Rankin

    (Department of Economics and Related Studies, University of York)

Abstract

We construct a staggered-price dynamic general equilibrium model with overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make an increase in government debt, with associated changes in lumpsum taxation, effective in raising short-run output. However we find this is very sensitive to the monetary policy rule. A permanent increase in debt under a basic Taylor Rule does not raise output. To make debt effective we need either a temporary nominal interest rate peg; or inertia in the rule; or an exogenous money supply policy; or to make the debt increase temporary.

Suggested Citation

  • Guido Ascari & Neil Rankin, 2010. "The Effectiveness of Government Debt for Demand Management: Sensitivity to Monetary Policy Rules," Quaderni di Dipartimento 133, University of Pavia, Department of Economics and Quantitative Methods.
    • Handle: RePEc:pav:wpaper:133
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    Cited by:

    1. Donal Smith, 2015. "Collateral Constraints and the Interest Rate," Discussion Papers 15/22, Department of Economics, University of York.
    2. Hylton Hollander, 2024. "Debt-financed fiscal stimulus in South Africa," Studies in Economics and Econometrics, Taylor & Francis Journals, vol. 48(1), pages 87-112, January.
    3. Galí, Jordi, 2020. "The effects of a money-financed fiscal stimulus," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 1-19.
    4. Noritaka Kudoh & Hong Thang Nguyen, 2011. "Taylor rules and the effects of debt-financed fiscal policy in a monetary growth model," Economics Bulletin, AccessEcon, vol. 31(3), pages 2480-2490.
    5. Dosi, Giovanni & Fagiolo, Giorgio & Napoletano, Mauro & Roventini, Andrea & Treibich, Tania, 2015. "Fiscal and monetary policies in complex evolving economies," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 166-189.
    6. Woodford, Michael & Xie, Yinxi, 2022. "Fiscal and monetary stabilization policy at the zero lower bound: Consequences of limited foresight," Journal of Monetary Economics, Elsevier, vol. 125(C), pages 18-35.
    7. Lorenza Rossi & Chiara Punzo, 2016. "Money-Financed versus Debt-Financed Fiscal Stimulus with Borrowing Constraints," DEM Working Papers Series 131, University of Pavia, Department of Economics and Management.
    8. Matthias Hansel, 2024. "Idiosyncratic Risk, Government Debt and Inflation," Papers 2403.00471, arXiv.org, revised Nov 2024.
    9. Albonico, Alice & Ascari, Guido & Gobbi, Alessandro, 2021. "The public debt multiplier," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    10. Ganelli, Giovanni & Rankin, Neil, 2020. "Fiscal deficits as a source of boom and bust under a common currency," Journal of International Money and Finance, Elsevier, vol. 104(C).
    11. Ma, Yong & Lv, Lin, 2022. "Money, debt, and the effects of fiscal stimulus," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 152-178.
    12. Bhattarai, Keshab & Trzeciakiewicz, Dawid, 2017. "Macroeconomic impacts of fiscal policy shocks in the UK: A DSGE analysis," Economic Modelling, Elsevier, vol. 61(C), pages 321-338.
    13. Asamoah, Lawrence Adu, 2016. "Fiscal Policy and Lending Rate Nexus in Ghana," MPRA Paper 80209, University Library of Munich, Germany.
    14. repec:spo:wpmain:info:hdl:2441/f6h8764enu2lskk9p6go0e900 is not listed on IDEAS
    15. Donal Smith, 2020. "Collateral Constraints and the Interest Rate," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(2), pages 137-165, May.
    16. repec:spo:wpecon:info:hdl:2441/f6h8764enu2lskk9p6go0e900 is not listed on IDEAS

    More about this item

    Keywords

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • 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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