Monetary Policy and Fiscal Rules
37 Pages Posted: 16 Mar 2004
Date Written: March 2004
This paper studies the performance of monetary policy under alternative fiscal regimes in a dynamic New Keynesian optimizing general equilibrium model with wealth effects. The interactions between fiscal policy and interest rate rules are shown to have relevant implications for the existence of a unique rational expectations equilibrium. When calibrated to Euro Area quarterly data, the model simulation results show that the preferred monetary-fiscal regime for inflation stabilization consists of a generalized Taylor rule with a low degree of inertia coupled with a public debt-GDP ratio targeting rule.
Keywords: Fiscal Policy Rules, Monetary Policy, Wealth Effects
JEL Classification: E52, E58, E63
Suggested Citation: Suggested Citation