Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/211967 
Authors: 
Year of Publication: 
2003
Series/Report no.: 
Bank of Finland Discussion Papers No. 34/2003
Publisher: 
Bank of Finland, Helsinki
Abstract: 
In this paper we introduce an application of the supply-side channel for fiscal policy to the basic New Keynesian model.We use a proportional tax rate instead of lump sum tax and introduce the distortions of a tax wedge.We derive a closed economy forward-looking model with government consumption and no capital. Households' labour supply decisions are endogenised.Monetary policy is conducted by a Taylor-type interest rate rule and fiscal policy follows a simple debt rule.We analyse the stability of the model when fiscal policy has both demand and supply-side effects and compare results with the standard case of only demand effects. We show that taking supply-side effects into account restricts the fiscal policy parameter range consistent with the dynamic stability of the economy.We also argue that allowing fiscal policy to affect both supply and demand results in more persistent inflation as well as output responses to shocks, than without the supply-side channel.We also discuss the different monetary and fiscal policy regimes and their implication on the stability of inflation and output.
Subjects: 
inflation
fiscal and monetary policy
stabilisation
JEL: 
E52
E31
E63
Persistent Identifier of the first edition: 
ISBN: 
952-462-108-8
Document Type: 
Working Paper

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