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.
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;PIERGALLINI, ALESSANDRO
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.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.