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Keywords:

  • E52;
  • E63
  • rule of thumb consumers;
  • DSGE;
  • determinacy;
  • limited asset market participation;
  • Taylor principle;
  • optimal simple rule;
  • automatic stabilizers

The combination of limited asset market participation and consumption habits generates indeterminacy for empirically plausible calibrations of a business cycle model characterized by price and nominal wage rigidities. Equilibrium determinacy is restored by demand management policies based on simple fiscal rules. In this regard, fiscal control of nominal income growth is particularly effective. In addition the complementarity between the Taylor rule and the fiscal feedback on nominal income growth produces relatively large welfare gains, limiting both aggregate and intragroup volatilities.