A Fiscal Stimulus with Deep Habits and Optimal Monetary Policy

Cristiano Cantore, Paul Levine (), Giovanni Melina and Bo Yang

No 512, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: A New-Keynesian model with deep habits and optimal monetary policy delivers a fiscal multiplier above one and the crowding-in effect on private consumption obtainable in a Real Business Cycle model à la Ravn et al. (2006). Optimized Taylor-type or price-level interest rate rules yield results close to optimal policy and dominate a conventional Taylor interest rate rule. Private consumption is crowded out only if the Taylor rule is sub-optimal and then negates the fiscal stimulus by responding strongly to the output gap, or if the ability to commit is absent. At the zero lower bound private consumption is always crowded in across simple rules.

Keywords: Deep habits; Optimal monetary policy; Price-level rule; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E30 E62 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2012-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Journal Article: A fiscal stimulus with deep habits and optimal monetary policy (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0512

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