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

  • Guido Ascari

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

  • Neil Rankin

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

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.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/wpaper/q133.pdf
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Paper provided by University of Pavia, Department of Economics and Quantitative Methods in its series Quaderni di Dipartimento with number 133.

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Length: 47 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:pav:wpaper:133
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  2. Jordi Galí & J. David López-Salido, 2003. "Understanding the Effects of Government Spending on Consumption," Working Papers 73, Barcelona Graduate School of Economics.
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  17. Alessandro Piergallini, 2006. "Real Balance Effects and Monetary Policy," Economic Inquiry, Western Economic Association International, vol. 44(3), pages 497-511, July.
  18. Tatiana Kirsanova & Campbell Leith & Simon Wren-Lewis, 2009. "Monetary and Fiscal Policy Interaction: The Current Consensus Assignment in the Light of Recent Developments," Economic Journal, Royal Economic Society, vol. 119(541), pages F482-F496, November.
  19. Benassy, Jean-Pascal, 2007. "IS-LM and the multiplier: A dynamic general equilibrium model," Economics Letters, Elsevier, vol. 96(2), pages 189-195, August.
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