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Spanish Economic Review

, Volume 9, Issue 1, pp 39–57 | Cite as

Monetary Rules and Deficit Shocks

  • Barbara Annicchiarico
  • Alessandro Piergallini
Regular Article

Abstract

Modern theory on interest rate rules is based on the representative agent framework with infinite-horizon consumers, thereby ignoring redistributions of the fiscal burden across generations due to deficit shocks. We show how the ‘Taylor principle’ relies on this restrictive assumption. In a dynamic New Keynesian general equilibrium model with overlapping generations, the existence of a unique stable rational expectations equilibrium may also occur under a passive monetary policy. However, active monetary policy is still required to stabilize the economy in response to fiscal shocks.

Keywords

Interest rate rules Nominal rigidities Deficit shocks Wealth effects 

JEL Classification

E52 E58 E63 

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Copyright information

© Springer-Verlag 2006

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of Rome ‘Tor Vergata’RomaItaly

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