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Taylor Rules Cause Fiscal Policy Ineffectiveness

Author

Listed:
  • Neil Rankin

    (University of Warwick)

  • Guido Ascari

    (University of Pavia)

Abstract

With the aim of constructing a dynamic general equilibrium model where fiscal policy can operate as a demand management tool, we develop a framework which combines staggered prices and overlapping generations based on uncertain lifetimes. Price stickiness plus lack of Ricardian Equivalence could be expected to make tax cuts, financed by increasing government debt, effective in raising short-run output. Surprisingly, in our baseline model this fails to occur. We trace the cause to the assumption that monetary policy is governed by a Taylor Rule. If monetary policy is instead governed by a money supply rule, fiscal policy effectiveness is restored.

Suggested Citation

  • Neil Rankin & Guido Ascari, 2008. "Taylor Rules Cause Fiscal Policy Ineffectiveness," 2008 Meeting Papers 632, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:632
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    Cited by:

    1. Annicchiarico, Barbara & Giammarioli, Nicola & Piergallini, Alessandro, 2012. "Budgetary policies in a DSGE model with finite horizons," Research in Economics, Elsevier, vol. 66(2), pages 111-130.
    2. Zbynek Stork, 2011. "A DSGE model of the Czech economy: a Ministry of Finance approach," EcoMod2011 3007, EcoMod.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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