Rule of Thumb Consumers, Public Debt and Income Tax

Raffaele Rossi

Working Papers from Business School - Economics, University of Glasgow

Abstract: This paper analyzes a New Keynesian model with Rule-of-Thumb consumers (ROTC) as in Galí et al.(2007) and a fiscal policy which levies a proportional income tax. We nd that, when the share of ROTC is above a specified threshold and di¤erently from the usual Leeper (1991) result, the determinacy condition requires for both monetary and fiscal policy to be either active of passive. Furthermore we show that the introduction of a set of ROTC can reverse the traditional predictions of a change in government spending on the economy as a whole: under a reasonable parametrization of the model, an increase in government spending can lead, against the common Keynesian wisdom, to a decrease in total output. Finally we point out that with the introduction of a distortive fiscal policy and independently of the parametrization used, private consumption responds negatively to a positive government spending shock.

Keywords: Rule-of-thumb-consumers; monetary-fiscal policy interactions; distortive taxation; public spend- ing; private consumption. (search for similar items in EconPapers)
JEL-codes: E32 E62 H30 (search for similar items in EconPapers)
Date: 2007-08, Revised 2007-12
New Economics Papers: this item is included in nep-cba, nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2007_44

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