Fiscal Policy under Balanced Budget and Indeterminacy: A New Keynesian Perspective

Giovanni Di Bartolomeo () and Marco Manzo

No 803, Working Papers from University of Crete, Department of Economics

Abstract: We investigate the effect of fiscal policy on equilibrium determinacy in a New Keynesian economy with rule-of-thumb (liquidity constrained) consumers and capital accumulation by focusing on the inter-action between monetary policy and taxation under the assumption of balanced budget. Our main finding is that taxation of firms¢ monopoly rents reduces the parameter range within which the Taylor principle is insufficient to guarantee equilibrium determinacy; hence it supports the determinacy of the rational expectation equilibrium.

Keywords: Rule-of-thumb consumers; equilibrium determinacy; fiscal and monetary policy inter-actions; tax distortions; balanced government budget. (search for similar items in EconPapers)
JEL-codes: E61 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: Written
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