Government Deficits, Wealth Effects and the Price Level in an Optimizing Model

42 Pages Posted: 26 Jan 2004

See all articles by Barbara Annicchiarico

Barbara Annicchiarico

University of Rome, Tor Vergata - Department of Economics and Finance; University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS)

Date Written: November 2003

Abstract

This paper investigates the inflationary effects of fiscal policy in an optimising general equilibrium monetary model with capital accumulation, flexible prices and wealth effects. The model is calibrated to Euro Area quarterly data. Simulation results show that government deficits, high debt level and slow fiscal adjustment adversely affect price stability in the presence of an independent monetary authority adopting a monetary targeting regime. The mechanism through which fiscal policy affects the dynamics of the price level presents monetarist properties, since the price level is determined in the monetary market. The effects produced by fiscal expansions on price dynamics are due to the behaviour of consumers, sharing the burden of fiscal adjustment with future generations. Fiscal variables are shown to influence the consumption plan of individuals and the demand for real money balances, thus affecting the equilibrium conditions in the money market where the price level is determined.

Keywords: Price stability, fiscal policy and government debt

JEL Classification: E31, E62

Suggested Citation

Annicchiarico, Barbara, Government Deficits, Wealth Effects and the Price Level in an Optimizing Model (November 2003). ECB Working Paper No. 285. Available at SSRN: https://ssrn.com/abstract=487448

Barbara Annicchiarico (Contact Author)

University of Rome, Tor Vergata - Department of Economics and Finance ( email )

Rome, I-00133
Italy

University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS) ( email )

Via Columbia, 2
Rome, I-00133
Italy

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