Hostname: page-component-8448b6f56d-c47g7 Total loading time: 0 Render date: 2024-04-23T23:29:38.943Z Has data issue: false hasContentIssue false
  • English
  • Français

DESIGNING MONETARY AND FISCAL POLICY RULES IN A NEW KEYNESIAN MODEL WITH RULE-OF-THUMB CONSUMERS

Published online by Cambridge University Press:  13 June 2012

Raffaele Rossi
Raffaele Rossi*
Affiliation:
University of Milano-Bicocca
*
Address correspondence for Raffaele Rossi, Department of Economics, University of Milano-Bicocca, Piazza dell'Ateneo Nuovo 1, 20126 Milan, Italy; e-mail: raffaele.rossi1@unimib.it.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper studies the determinacy properties of monetary and fiscal policy rules in a small-scale New Keynesian model. We modify the standard model in two ways. First, we allow positive public debt in the steady state as in Leeper [Journal of Monetary Economics 27, 129–147 (1991)]. Second, we add rule-of-thumb consumers as in Bilbiie [Journal of Economic Theory 140, 162–196 (2008)]. Leeper studied a model in which Ricardian equivalence holds, and he showed that monetary and fiscal policy can be studied independently. In Bilbiie's analysis, rule-of-thumb consumers break the Ricardian equivalence and generate important consequences for the design of monetary policy. In his model, steady-state public debt was equal to zero. We study a model with both rule-of-thumb consumers and positive steady-state public debt. We find that the mix of fiscal and monetary policies that guarantees equilibrium determinacy is sensitive to the exact values of the parameters of the model.

Keywords

Rule-of-thumb consumersRicardian equivalencePublic debtMonetary–fiscal policy interactions
Type
Articles
Information
Macroeconomic Dynamics , Volume 18 , Issue 2 , March 2014 , pp. 395 - 417
Copyright
Copyright © Cambridge University Press 2012 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Ascari, G., Colciago, A., and Rossi, L. (2011) Limited Asset Market Participation: Does it Really Matter for Monetary Policy. Bank of Finland research discussion paper 15-2011.Google Scholar
Barro, R. (1974) Are government bonds net wealth? Journal of Political Economy 82, 1095–1117.Google Scholar
Bernanke, B. and Woodford, M. (1998) Inflation forecasts and monetary policy. Journal of Money, Credit and Banking 29, 653–685.CrossRefGoogle Scholar
Bilbiie, F.O. (2008) Limited asset markets participation, monetary policy and (inverted) Keynesian logic. Journal of Economic Theory 140, 162–196.Google Scholar
Bilbiie, F.O. and Straub, R. (2004) Fiscal Policy, Business Cycles and Labor-Market Fluctuations. MNB working paper 2004/6.Google Scholar
Blanchard, O. (1985) Debt, deficits, and finite horizons. Journal of Political Economy 93, 223–247.Google Scholar
Calvo, G.A. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12, 383–398.CrossRefGoogle Scholar
Carlstrom, T. and Fuerst, S. (2005) Investment and interest rate policy: A discrete time analysis. Journal of Economic Theory 123, 4–20.Google Scholar
Clarida, R., Galí, J. and Gertler, M. (1999) The science of monetary policy: A New Keynesian perspective. Journal of Economic Literature 37, 1661–1707.Google Scholar
Clarida, R., Galí, J., and Gertler, M. (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115, 147–180.Google Scholar
Colciago, A. (2011) Rule of thumb consumers meet sticky wages. Journal of Money Credit and Banking 43, 325–353.CrossRefGoogle Scholar
Davig, T. and Leeper, E. (2006) Fluctuating macro policies and the fiscal theory. NBER Macroeconomics Annual 2006, 21, 247–316.Google Scholar
Di Bartolomeo, G. and Rossi, L. (2007) Effectiveness of monetary policy and limited asset market participation: Neoclassical versus Keynesian effects. International Journal of Economic Theory 3, 213–218.CrossRefGoogle Scholar
Felippa, C.A. and Perk, K.C. (2004) Synthesis Tools for Structural Dynamics and Partitioned Analysis of Coupled Systems. Mimeo, Aerospace Engineering Sciences and Center for Aerospace Structures.Google Scholar
Galí, J., Lopez-Salido, D., and Valles, J. (2004) Rule-of-thumb consumers and the design of interest rate rules. Journal of Money, Credit and Banking 36, 739–763.Google Scholar
Galí, J., Lopez-Salido, D., and Valles, J. (2007) Understanding the effect of public spending on consumption. Journal of European Economic Association 5, 227–270.CrossRefGoogle Scholar
Leeper, E. (1991) Equilibria under “active” and “passive” monetary and fiscal policies. Journal of Monetary Economics 27, 129–147.Google Scholar
Leith, C. and von Thadden, L. (2008) Monetary and fiscal interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers. Journal of Economic Theory 140, 279–313.Google Scholar
Leith, C. and Wren-Lewis, S. (2000) Interactions between monetary and fiscal policy rules. Economic Journal 110, 93–108.Google Scholar
Linnemann, L. (2006) Interest rate policy, debt, and the indeterminacy with distortive taxation. Journal of Economic Dynamics and Control 30, 487–510.CrossRefGoogle Scholar
Motta, G. and Tirelli, P. (2010) Rule-of-Thumb Consumers, Consumption Habits and the Taylor Principle, University of Milano-Bicocca WP 194.Google Scholar
Samuelson, P. (1941) Conditions that the roots of a polynomial be less than unity in absolute value. Annals of Mathematical Statistics 12, 360–364.CrossRefGoogle Scholar
Schmitt-Grohé, S. and Uribe, M. (2007) Optimal simple and implementable monetary and fiscal rules. Journal of Monetary Economics 54, 1702–1725.Google Scholar
Taylor, J. (1993) Discretion versus policy rules in practice. Carnegie Rochester Conference Series on Public Policy 39, 195–214.CrossRefGoogle Scholar
Woodford, M. (2003) Interest and Prices. Princeton University Press.Google Scholar