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Taylor Rules Cause Fiscal Policy Ineffectiveness

Author

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  • Guido Ascari
  • Neil Rankin

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

  • Guido Ascari & Neil Rankin, 2007. " Taylor Rules Cause Fiscal Policy Ineffectiveness," CDMA Conference Paper Series 0707, Centre for Dynamic Macroeconomic Analysis.
  • Handle: RePEc:san:cdmacp:0707
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    File URL: https://www.st-andrews.ac.uk/CDMA/papers/cp0707.pdf
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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

    Keywords

    staggered prices; overlapping generations; fiscal policy effectiveness; Taylor Rules.;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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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