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New Directions in Monetary and Fiscal Policy Analysis at the Macroeconomic Level

Grant reference: RES-062-23-1436

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Monetary and fiscal policy under deep habits
Recent work on optimal policy in sticky price models suggests that demand management through fiscal policy adds little to optimal monetary policy. We explore this consensus assignment in an economy subject to ‘deep’ habits at the level of individual goods where the counter-cyclicality of mark-ups this implies can result in government spending crowding-in private consumption in the short run. We explore the robustness of this mechanism to the existence of price discrimination in the supply of goods to the public and private sectors. We then describe optimal monetary and fiscal policy in our New Keynesian economy subject to the additional externality of deep habits and explore the ability of simple (but potentially nonlinear) policy rules to mimic fully optimal policy.
English

Primary contributor

Author Campbell Leith

Additional contributors

Co-author Ioana Moldovan
Co-author Raffaele Rossi

Additional details

University of Glasgow
09 September 2009
53
Glasgow

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Cite this outcome

Harvard

Leith, Campbell et al (2009) Monetary and fiscal policy under deep habits. Glasgow: University of Glasgow.

Vancouver

Leith Campbell et al. Monetary and fiscal policy under deep habits. Glasgow: University of Glasgow, 2009.