FISCAL POLICY UNDER BALANCED BUDGET AND INDETERMINACY: A NEW KEYNESIAN PERSPECTIVE

Giovanni Di Bartolomeo () and Marco Manzo

Scottish Journal of Political Economy, 2010, vol. 57, issue 4, 455-472

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 enforce the Taylor principle – the prescription that the nominal interest rate must respond more than one for a unitary change in inflation – as a criterion for equilibrium determinacy.

Date: 2010
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https://doi.org/10.1111/j.1467-9485.2010.00526.x

Related works:
Working Paper: Fiscal Policy under Balanced Budget and Indeterminacy: A New Keynesian Perspective (2008)
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