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

Author

Listed:
  • Noritaka Kudoh

    (Hokkaido University)

  • Hong Thang Nguyen

    (Hokkaido University)

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.

Suggested Citation

  • Noritaka Kudoh & Hong Thang Nguyen, 2011. "Taylor rules and the effects of debt-financed fiscal policy in a monetary growth model," Economics Bulletin, AccessEcon, vol. 31(3), pages 2480-2490.
    • Handle: RePEc:ebl:ecbull:eb-11-00328
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Taylor rules; budget deficits; overlapping generations.;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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