Fiscal Policy under Balanced Budget and Indeterminacy: A New Keynesian Perspective
Giovanni Di Bartolomeo
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 reduces the parameter range within which the Taylor principle is insufficient to guarantee equilibrium determinacy; hence it supports the determinacy of the rational expectation equilibrium.
Rule-of-thumb consumers, equilibrium determinacy, fiscal and monetary policy inter-actions, tax distortions, balanced government budget.
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