Essays in monetary and fiscal policy.
PhD thesis, University of Glasgow.
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This thesis is composed by four chapters on New Keynesian macroeconomics.
Chapter 1 develops a small New Keynesian model augmented with a steady state level of public debt and a share of rule-of-thumb consumers (ROTC henceforth) as in Galí et
al. (2004; 2007). This chapter focuses on the consequences for the design of monetary and �scal rules, of the bifurcation on the demand side of the economy generated by the presence of ROTC, in the absence of Ricardian equivalence. When �scal policy follows a balanced budget rule, the share of ROTC determines whether an active and/or a passive monetary policy in the sense of Leeper (1991) guarantees determinacy. When a short run public debt asset is introduced, the amount of ROTC determines whether equilibrium determinacy requires a mix of active (passive) monetary policy and a passive (active) fiscal policy or a mix where both policies are active or passive.
Chapter 2 studies the equilibrium determinacy of a New Keynesian model augmented with trend inflation, public debt and distortionary taxation. Both the level of long run inflation as well as the stock of steady state public debt have to be explicitly taken into consideration for the characterisation of the equilibrium dynamics between monetary and fiscal policy.
Chapter 3 considers the implications of external habits for optimal monetary policy in an otherwise standard New Keynesian model, when those habits exist at the level
of individual goods as in Ravn et al. (2006). External habits generate an additional distortion in the economy, which implies that the flex-price equilibrium will no longer be efficient and that policy faces interesting new trade-offs and potential stabilisation biases.
The endogenous mark-up behaviour, which emerges with deep habits, signi�cantly a¤ects the optimal policy response to shocks and the stabilising properties of standard simple
Chapter 4 analyses both optimal monetary and �scal policy in a New Keynesian model augmented with deep habits and valuable government spending. We �find that, in line with the general consensus in the macro literature, �scal policy adds very little to optimal monetary policy as a stabilisation device.
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