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Budgetary Policies in a DSGE Model with Finite Horizons

This paper presents a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite horizons. Our New Keynesian framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. The model predicts that fiscal expansions generate a tradeoff in output dynamics between short-term gains and medium-term losses. It is shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization.

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Paper provided by Tor Vergata University, CEIS in its series CEIS Research Paper with number 207.

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Length: 39 pages
Date of creation: 12 Jul 2011
Date of revision: 12 Jul 2011
Handle: RePEc:rtv:ceisrp:207
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