Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers

Campbell Leith and Leopold von Thadden

No 2006,21, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: This paper develops a small New Keynesian model with capital accumulation and government debt dynamics. The paper discusses the design of simple monetary and fiscal policy rules consistent with determinate equilibrium dynamics in the absence of Ricardian equivalence. Under this assumption, government debt turns into a relevant state variable which needs to be accounted for in the analysis of equilibrium dynamics. The key analytical finding is that without explicit reference to the level of government debt it is not possible to infer how strongly the monetary and fiscal instruments should be used to ensure determinate equilibrium dynamics. Specifically, we identify in our model discontinuities associated with threshold values of steady-state debt, leading to qualitative changes in the local determinacy requirements. These features extend the logic of Leeper (1991) to an environment in which fiscal policy is non-neutral. Naturally, this non-neutrality increases the importance of fiscal aspects for the design of policy rules consistent with determinate dynamics.

Keywords: Monetary policy; Fiscal regimes (search for similar items in EconPapers)
JEL-codes: E52 E63 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers (2008)
Working Paper: Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers (2006)
Working Paper: Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers (2006)
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