Taylor rules and the effects of debt-financed fiscal policy in a monetary growth model

Noritaka Kudoh and Hong Thang Nguyen

Economics Bulletin, 2011, vol. 31, issue 3, 2480-2490

Abstract: We explore the long-run implications of adopting a Taylor-type interest-rate rule in a simple monetary growth model in which budget deficits are financed partly by unbacked government debt. Because monetary policy is accommodative only when it is passive, the Taylor principle, which requires monetary policy to be active, itself generates a negative relationship between output and inflation. As a result, a permanent increase in government consumption becomes contractionary. Thus, policy makers face a choice between implementing an activist fiscal policy and following the Taylor principle.

Keywords: Taylor rules; budget deficits; overlapping generations. (search for similar items in EconPapers)
JEL-codes: E5 E6 (search for similar items in EconPapers)
Date: 2011-08-30
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