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Optimal Simple Monetary and Fiscal Rules under Limited Asset Market Participation

Authors


  • 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.

Abstract

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.

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