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A Fiscal Stimulus with Deep Habits and Optimal Monetary Policy

  • Cristiano Cantore

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

  • Giovanni Melina

    (University of Surrey)

  • Bo Yang

    (University of Surrey)

A New-Keynesian model with deep habits and optimal monetary policy delivers a fiscal multiplier above one and the crowding-in effect on private consumption obtainable in a Real Business Cycle model à la Ravn et al. (2006). Optimized Taylor-type or price-level interest rate rules yield results close to optimal policy and dominate a conventional Taylor interest rate rule. Private consumption is crowded out only if the Taylor rule is sub-optimal and then negates the fiscal stimulus by responding strongly to the output gap, or if the ability to commit is absent. At the zero lower bound private consumption is always crowded in across simple rules.

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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 0512.

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Length: 17 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:sur:surrec:0512
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