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Fiscal and Monetary Policy in a New Keynesian Model with Tobin’s Q Investment Theory Features

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  • Giannoulakis, Stylianos
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    The purpose of this article is to carefully lay out the internal monetary and fiscal transmission mechanisms in the context of a New Keynesian model, with a particular focus on the role of capital - the most vital ingredient in the transition from the basic framework to the medium - scale DSGE models. The key concept of this paper is the form of the monetary policy: we assume a two-channel monetary policy, i.e. it is conducted through a rule for money supply and a Taylor-type rule for interest rates, in order to keep up with the ECB and Fed’s policies. We also adopt a simple fiscal policy rule for public consumption to examine the interactions between fiscal and monetary policy. Finally, in order to capture the crisis effects we introduce exogenous shocks to both monetary and fiscal policy rules.

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    File URL: https://mpra.ub.uni-muenchen.de/80892/1/MPRA_paper_80892.pdf
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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 80892.

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    Date of creation: 04 May 2017
    Handle: RePEc:pra:mprapa:80892
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    1. Jean-Christophe Poutineau & Karolina Sobczak & Gauthier Vermandel, 2015. "The analytics of the New Keynesian 3-equation Model," Post-Print halshs-01184591, HAL.
    2. Jordi Galí, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters,in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework Princeton University Press.
    3. Del Negro, Marco & Sims, Christopher A., 2015. "When does a central bank׳s balance sheet require fiscal support?," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 1-19.
    4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    5. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    6. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
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