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Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>10/2012
<mark>Journal</mark>Journal of Money, Credit and Banking
Issue number7
Volume44
Number of pages24
Pages (from-to)1351–1374
Publication statusPublished
Early online date19/09/12
Original languageEnglish

Abstract

The combination of limited asset market participation and consumption habits generates indeterminacy for empirically plausible calibrations of a business cycle model characterized by price and nominal wage rigidities. Equilibrium determinacy is restored by demand management policies based on simple fiscal rules. In this regard, fiscal control of nominal income growth is particularly effective. In addition the complementarity between the Taylor rule and the fiscal feedback on nominal income growth produces relatively large welfare gains, limiting both aggregate and intragroup volatilities.