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

Listed author(s):
  • 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
Handle: RePEc:pav:wpaper:133
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  1. 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 482-496, November.
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  3. Chadha, J.S. & Charles Nolan, 2002. "Optimal Simple Rules for the Conduct of Monetary and Fiscal Policy," Cambridge Working Papers in Economics 0224, Faculty of Economics, University of Cambridge.
  4. Guido Ascari, 2004. "Staggered prices and trend inflation: some nuisances," Macroeconomics 0404029, EconWPA.
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  16. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
  17. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  18. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
  19. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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