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Fiscal Policy under Balanced Budget and Indeterminacy: A New Keynesian Perspective

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  • Giovanni Di Bartolomeo
  • Marco Manzo

Abstract

We investigate the effect of fiscal policy on equilibrium determinacy in a New Keynesian economy with rule‐of‐thumb (liquidity‐constrained) consumers and capital accumulation by focusing on the inter‐action between monetary policy and taxation under the assumption of balanced budget. Our main finding is that taxation of firms' monopoly rents enforce the Taylor principle – the prescription that the nominal interest rate must respond more than one for a unitary change in inflation – as a criterion for equilibrium determinacy.
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  • Giovanni Di Bartolomeo & Marco Manzo, 2008. "Fiscal Policy under Balanced Budget and Indeterminacy: A New Keynesian Perspective," Working Papers 0803, University of Crete, Department of Economics.
    • Handle: RePEc:crt:wpaper:0803
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    Cited by:

    1. Manzo, Marco & Monteduro, Maria Teresa, 2010. "From IRAP to CBIT: tax distortions and redistributive effects," MPRA Paper 28070, University Library of Munich, Germany.

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    More about this item

    Keywords

    Rule-of-thumb consumers; equilibrium determinacy; fiscal and monetary policy inter-actions; tax distortions; balanced government budget;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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