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Monetary and Fiscal Policy Rules with Labour Market and Financial Frictions

Grant reference: RES-062-23-2451

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Journal article details

A fiscal stimulus with deep habits and optimal monetary policy
The efficacy of a fiscal stimulus remains a controversial issue in applied macroeconomics. In particular, the range of empirical government spending multipliers is wide –the numbers in the literature range between 0.8 and 1.5 – and the sign of the effect on private consumption is controversial. In fact, part of the empirical literature finds evidence for a crowding out of consumption, while many structural vector-autoregressions (SVARs) provide evidence for a crowding-in effect. Canonical dynamic stochastic general equilibrium (DSGE) models typically predict fiscal multipliers well below the empirical range and the crowding out of private consumption. A modelling device that has been used to obtain the consumption crowding in and higher fiscal multipliers in real business cycle (RBC) models is the assumption that external ‘deep habits’ a` la Ravn et al. (2006) are formed in private and public consumption, i.e. habits on the average consumption level of each variety of goods. This paper also investigates these issues in an NK model with deep habits, but pays particular attention to the subtle interactions between fiscal and monetary policy that determine the outcome of a fiscal stimulus. The results are that a NK model with deep habits and optimal monetary policy delivers a larger-than-unity fiscal multiplier and consumption crowding in.
http://dx.doi.org/10.1016/j.econlet.2012.05.051
10.1016/j.econlet.2012.05.051
English

Primary contributor

Author Cristiano Cantore

Additional contributors

Co-author Paul Levine
Co-author Giovanni Melina
Co-author Bo Yang

Additional details

117
1
Yes
0165-1765
http://www.elsevier.com/wps/find/authorsview.authors/fundingbodyagreements
Elsevier
01 October 2012
348-353
Amsterdam
Post-print
Economics letters

Files

CLMY_optimal_WP_Version.pdf (.pdf / 250kb)

Cite this outcome

Harvard

Cantore, Cristiano et al (2012) A fiscal stimulus with deep habits and optimal monetary policy. Economics letters. 117 (1), pp. 348-353 Amsterdam: Elsevier.

Vancouver

Cantore Cristiano et al. A fiscal stimulus with deep habits and optimal monetary policy. Economics letters 2012; 117 (1): 348-353.