We consider a New Keynesian model with nominal rigidities and fractional cash in-advance constraint on consumption expenditures. We study the stability properties of the model when Taylor rules react either to current inflation or to expected one. We account for different public sector budget identities and different fiscal policies ensuring Government solvency. Under an independent Central Bank, forward-looking Taylor rules promote sunspot fluctuations more easily than contemporaneous ones because they set in motion a mechanism of self-fulfilling prophecies. Conversely, the introduction of capital as an asset alongside public securities facilitates smoothing behavior and reduces the region of indeterminacy but brings out multiple steady states. When public sector budget identities are consolidated, the stabilization of total public liabilities reduces the likelihood of sunspot fluctuations and even rules them out in the presence of capital accumulation. Finally, we perform a complete welfare analysis allowing to rank equilibria and to identify the best policy mix to implement Pareto-superior outcomes.

Taylor and fiscal rules: When do they stabilize the economy?

Francesco Magris;
2024-01-01

Abstract

We consider a New Keynesian model with nominal rigidities and fractional cash in-advance constraint on consumption expenditures. We study the stability properties of the model when Taylor rules react either to current inflation or to expected one. We account for different public sector budget identities and different fiscal policies ensuring Government solvency. Under an independent Central Bank, forward-looking Taylor rules promote sunspot fluctuations more easily than contemporaneous ones because they set in motion a mechanism of self-fulfilling prophecies. Conversely, the introduction of capital as an asset alongside public securities facilitates smoothing behavior and reduces the region of indeterminacy but brings out multiple steady states. When public sector budget identities are consolidated, the stabilization of total public liabilities reduces the likelihood of sunspot fluctuations and even rules them out in the presence of capital accumulation. Finally, we perform a complete welfare analysis allowing to rank equilibria and to identify the best policy mix to implement Pareto-superior outcomes.
2024
1-feb-2024
Pubblicato
https://doi.org/10.1016/j.mathsocsci.2024.01.004
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11368/3070959
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