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Is it Possible to Go Back to Ad Hoc Macroeconomic Models? The Case of the Romer-Taylor Model

Alejandro Rodríguez Arana
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Alejandro Rodríguez Arana: Department of Economics, Universidad Iberoamericana, Mexico City. Mexico

Working Papers from Universidad Iberoamericana, Department of Economics

Abstract: In absence of fiscal stabilizing rules, the original Romer-Taylor model is unstable in the issuing of government bonds. Adding a wealth effect to the consumption function seems reasonable to provide rationality to the consumers, but that destabilize even more the Romer-Taylor’s framework. A fiscal stabilizing rule, where there is a tax on the wealth effect for consumers, may stabilize output, inflation and the government budget constraint in the long run. In this context, the renewed Romer-Taylor model constitutes a good instrument to provide policy prescriptions.

Date: 2012
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