Monetary and fiscal policy under deep habits

Campbell Leith, Ioana Moldovan () and Raffaele Rossi

Working Papers from Business School - Economics, University of Glasgow

Abstract: Recent work on optimal policy in sticky price models suggests that demand management through fiscal policy adds little to optimal monetary policy. We explore this consensus assignment in an economy subject to ‘deep’ habits at the level of individual goods where the counter-cyclicality of mark-ups this implies can result in government spending crowding-in private consumption in the short run. We explore the robustness of this mechanism to the existence of price discrimination in the supply of goods to the public and private sectors. We then describe optimal monetary and fiscal policy in our New Keynesian economy subject to the additional externality of deep habits and explore the ability of simple (but potentially nonlinear) policy rules to mimic fully optimal policy.

Keywords: Monetary Policy; Fiscal Policy; Deep Habits; New Keynesian (search for similar items in EconPapers)
JEL-codes: E21 E61 E63 (search for similar items in EconPapers)
Date: 2009-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Monetary and fiscal policy under deep habits (2015)
Working Paper: Monetary and Fiscal Policy under Deep Habits (2009)
Working Paper: Monetary and Fiscal Policy under Deep Habits (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2009_32

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