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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. Leith, Campbell & von Thadden, Leopold, 2006. "Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers," Discussion Paper Series 1: Economic Studies 2006,21, Deutsche Bundesbank, Research Centre.
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  15. Jean-Pascal Benassy, 2005. "Interest Rate Rules, Price Determinacy and the Value of Money in a non Ricardian World," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 651-667, July.
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  17. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2009. "When is the government spending multiplier large?," NBER Working Papers 15394, National Bureau of Economic Research, Inc.
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  19. 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.
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