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How Does the Effectiveness of Fiscal Deficit Stimulus Depend on the Expected Path of Debt Stabilisation? Unorthodox Outcomes When Monetary Policy Follows a Simple Taylor Rule

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  • Neil Rankin

Abstract

Staggered prices and finitely-lived agents create scope for a debt-financed tax cut to raise output. We study analytically how the impact multiplier depends on whether debt is expected gradually to return to its original level or else to rise to a permanently higher level, and on the speed of this. Under a simple Taylor Rule, the first debt path raises, but the second lowers, output on impact. With the first debt path, the multiplier is also probably hill-shaped in debt persistence. However, even a short-lived initial exogenous nominal interest-rate peg makes the multiplier probably positive with both debt paths.

Suggested Citation

  • Neil Rankin, 2026. "How Does the Effectiveness of Fiscal Deficit Stimulus Depend on the Expected Path of Debt Stabilisation? Unorthodox Outcomes When Monetary Policy Follows a Simple Taylor Rule," Discussion Papers 26/01, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:26/01
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    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
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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