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Monetary and fiscal policy rules in a model with capital accumulation and potentially non-superneutral money

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  • von Thadden, Leopold

Abstract

We consider the properties of two monetary policy rules (monetary targeting, Taylor-type interest rate rule) in an intertemporal equilibrium model with capital accumulation and two outside assets (government bonds, fiat money). The paper shows that the long-run behaviour of the economy depends critically on whether under the monetary-fiscal regime the steady-state real interest rate is independent of inflation. If this is the case, there exists in our model a unique steady state with stable adjustment dynamics under either monetary policy rule. By contrast, if superneutrality fails, dynamics under the interest rate rule may suffer from global indeterminacy arising from multiple steady states which do not necessarily differ in terms of the 'activeness' of the interest rate feedback on inflation. This is ruled out under monetary targeting.

Suggested Citation

  • von Thadden, Leopold, 2002. "Monetary and fiscal policy rules in a model with capital accumulation and potentially non-superneutral money," Discussion Paper Series 1: Economic Studies 2002,22, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdp1:4187
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    References listed on IDEAS

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    1. Gabriel Pérez Quirós & Hugo Rodríguez, 2000. "The daily market for funds in Europe: Has something changed with the EMU?," Economics Working Papers 474, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Hartmann, Philipp & Manna, Michele & Manzanares, Andres, 2001. "The microstructure of the euro money market," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 895-948, November.
    3. Juan Ayuso & Rafael Repullo, 2003. "A Model of the Open Market Operations of the European Central Bank," Economic Journal, Royal Economic Society, vol. 113(490), pages 883-902, October.
    4. Ho, Thomas S Y & Saunders, Anthony, 1985. " A Micro Model of the Federal Funds Market," Journal of Finance, American Finance Association, vol. 40(3), pages 977-988, July.
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    Cited by:

    1. Leopold von Thadden, 2004. "Active monetary policy, passive fiscal policy and the value of pure debt: some further monetarist arithmetic," Money Macro and Finance (MMF) Research Group Conference 2003 108, Money Macro and Finance Research Group.
    2. von Thadden, Leopold, 2004. "Active monetary policy, passive fiscal policy and the value of public debt: Some further monetarist arithmetic," Journal of Macroeconomics, Elsevier, vol. 26(2), pages 223-251, June.

    More about this item

    Keywords

    Monetary Policy; Fiscal regimes; Overlapping generations;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary 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
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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