Fiscal and Monetary Policy Interactions in a New Keynesian Model with Liquidity Constraints

Vito Muscatelli, Tiziano Ropele and Patrizio Tirelli

No 83, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: This paper derives a New Keynesian dynamic general equilibrium model with liquidity constrained consumers and sticky prices. The model allows a role for both government spending and taxation in the DGE model. The model is then estimated using Euro area data. We demonstrate that there seems to be a significant role for rule-of-thumb consumer behaviour. Our model is then used to analyse the interaction between fiscal and monetary policies. We examine the extent to which fiscal policy (automatic stabilisers) assist or hinder monetary policy when the latter takes a standard forward-looking inflation targeting form. We also examine the extent to which inertia in fiscal policy and the presence of rule-of-thumb consumers affects output and inflation variability in the presence of such a monetary policy rule.

JEL-codes: E58 E62 E63 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2004-11, Revised 2004-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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http://repec.dems.unimib.it/repec/pdf/mibwpaper83.pdf First version, 2004 (application/pdf)

Related works:
Working Paper: Fiscal and Monetary policy Interactions in a New Keynesian Model with Liquidity Constraints (2005)
Working Paper: Fiscal and Monetary Policy Interactions in a New Keynesian Model with Liquidity Constraints (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:mib:wpaper:83

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