Modern theory on interest rate rules is based on the representative agent framework with infinite-horizon consumers, thereby ignoring redistributions of the fiscal burden across generations due to deficit shocks. We show how the 'Taylor principle' relies on this restrictive assumption. In a dynamic New Keynesian general equilibrium model with overlapping generations, the existence of a unique stable rational expectations equilibrium may also occur under a passive monetary policy. However, active monetary policy is still required to stabilize the economy in response to fiscal shocks. © Springer-Verlag 2007.
Annicchiarico, B., Piergallini, A. (2007). Monetary Rules and Deficit Shocks. SPANISH ECONOMIC REVIEW, 9(1), 39-57 [10.1007/s10108-006-9009-8].
Monetary Rules and Deficit Shocks
Annicchiarico, Barbara
Writing – Original Draft Preparation
;
2007-01-01
Abstract
Modern theory on interest rate rules is based on the representative agent framework with infinite-horizon consumers, thereby ignoring redistributions of the fiscal burden across generations due to deficit shocks. We show how the 'Taylor principle' relies on this restrictive assumption. In a dynamic New Keynesian general equilibrium model with overlapping generations, the existence of a unique stable rational expectations equilibrium may also occur under a passive monetary policy. However, active monetary policy is still required to stabilize the economy in response to fiscal shocks. © Springer-Verlag 2007.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
