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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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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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