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

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  • Alejandro Rodríguez Arana

    (Department of Economics, Universidad Iberoamericana, Mexico City. Mexico)

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.

Suggested Citation

  • Alejandro Rodríguez Arana, 2012. "Is it Possible to Go Back to Ad Hoc Macroeconomic Models? The Case of the Romer-Taylor Model," Working Papers 0312, Universidad Iberoamericana, Department of Economics.
    • Handle: RePEc:uic:wpaper:0312
    as

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    References listed on IDEAS

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