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Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation

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  • GIORGIO MOTTA
  • PATRIZIO TIRELLI

Abstract

The combination of limited asset market participation and consumption habits generates indeterminacy for empirically plausible calibrations of a business cycle model characterized by price and nominal wage rigidities. Equilibrium determinacy is restored by demand management policies based on simple fiscal rules. In this regard, fiscal control of nominal income growth is particularly effective. In addition the complementarity between the Taylor rule and the fiscal feedback on nominal income growth produces relatively large welfare gains, limiting both aggregate and intragroup volatilities.

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  • Giorgio Motta & Patrizio Tirelli, 2012. "Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(7), pages 1351-1374, October.
    • Handle: RePEc:wly:jmoncb:v:44:y:2012:i:7:p:1351-1374
    DOI: 10.1111/j.1538-4616.2012.00535.x
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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