We gratefully acknowledge helpful discussions with Andrea Colciago and Raffaele Rossi. We would like to thank Guido Ascari, Luisanna Onnis, Dario Pontiggia, and Lorenza Rossi for comments and suggestions. Patrizio Tirelli gratefully acknowledges financial support from Miur (Prin Projects 2008). The usual disclaimer applies.
Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation
Article first published online: 19 SEP 2012
© 2012 The Ohio State University
Journal of Money, Credit and Banking
Volume 44, Issue 7, pages 1351–1374, October 2012
How to Cite
MOTTA, G. and TIRELLI, P. (2012), Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation. Journal of Money, Credit and Banking, 44: 1351–1374. doi: 10.1111/j.1538-4616.2012.00535.x
- Issue published online: 19 SEP 2012
- Article first published online: 19 SEP 2012
- Received April 18, 2011; and accepted in revised form March 14, 2012.
- rule of thumb consumers;
- 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.