Fiscal Policy in a Monetary Economy with Capital and Finite Lifetime

54 Pages Posted: 2 Aug 2006

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)

Nicola Giammarioli

European Central Bank (ECB)

Alessandro Piergallini

Tor Vergata University

Date Written: July 2006

Abstract

This paper develops a dynamic stochastic general equilibrium model with nominal rigidities, capital accumulation and finite lifetimes. The framework exhibits intergenerational wealth effects and is intended to investigate the macroeconomic implications of fiscal policy, which is specified by either a debt-based tax rule or a balanced-budget rule allowing for temporary deficits. When calibrated to euro area quarterly data, the model predicts that fiscal expansions generate a tradeoff in output dynamics between short-term gains and medium-term losses. It is also shown that the effects of fiscal shocks crucially depend upon the conduct of monetary policy. Simulation analysis suggests that balanced-budget requirements enhance the determinacy properties of feedback interest rate rules by guaranteeing inflation stabilization.

Keywords: Fiscal Policy, Monetary Policy, Nominal Rigidities, Capital Accumulation, Finite Lifetime, Simulations

JEL Classification: E52, E58, E63

Suggested Citation

Annicchiarico, Barbara and Giammarioli, Nicola and Piergallini, Alessandro, Fiscal Policy in a Monetary Economy with Capital and Finite Lifetime (July 2006). ECB Working Paper No. 661. Available at SSRN: https://ssrn.com/abstract=916096

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

Nicola Giammarioli

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Alessandro Piergallini

Tor Vergata University ( email )

Via Columbia 2
Rome, Rome 00133
Italy
+390672595431 (Phone)
+39062020500 (Fax)

HOME PAGE: http://www.economia.uniroma2.it/piergallini

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