Budgetary Policies in a DSGE Model with Finite Horizons

Budgetary Policies in a DSGE Model with Finite Horizons

Barbara Annicchiarico (), Nicola Giammarioli and Alessandro Piergallini ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper presents a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite horizons. Our New Keynesian framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. When calibrated to euro area quarterly data, the model predicts that fiscal expansions generate a trade-off in output dynamics between short-term gains and medium-term losses. It is shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization.

Keywords: Fiscal Policy; Monetary Policy; Nominal Rigidities; Capital Accumulation; Finite Lifetime; Simulations. (search for similar items in EconPapers)
JEL-codes: E52 D58 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-dge, nep-mac and nep-mon
Date: 2009-01
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Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:12650

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