How Does the Effectiveness of Fiscal Deficit Stimulus Depend on the Expected Path of Debt Stabilisation? Unorthodox Outcomes When Monetary Policy Follows a Simple Taylor Rule

Neil Rankin

Discussion Papers from Department of Economics, University of York

Abstract: Staggered prices and finitely-lived agents create scope for a debt-financed tax cut to raise output. We study analytically how the impact multiplier depends on whether debt is expected gradually to return to its original level or else to rise to a permanently higher level, and on the speed of this. Under a simple Taylor Rule, the first debt path raises, but the second lowers, output on impact. With the first debt path, the multiplier is also probably hill-shaped in debt persistence. However, even a short-lived initial exogenous nominal interest-rate peg makes the multiplier probably positive with both debt paths.

Keywords: fiscal deficit; staggered prices; finitely-lived agents; overlapping generations; output multiplier; debt persistence; debt gradualism; Taylor Rule; temporary nominal interest-rate peg (search for similar items in EconPapers)
JEL-codes: E62 E63 H62 (search for similar items in EconPapers)
Date: 2026-01
New Economics Papers: this item is included in nep-dge
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