Resumen de Monetary Rules and Deficit Shocks

Barbara Annicchiarico, Alessandro Piergallini

• Modern theory on interest rate rules is based on the representative agent framework with infinite-horizon consumers, thereby ignoring redistributions of the fiscal burden across generations due to deficit shocks. We show how the ¿Taylor principle¿ relies on this restrictive assumption. In a dynamic New Keynesian general equilibrium model with overlapping generations, the existence of a unique stable rational expectations equilibrium may also occur under a passive monetary policy. However, active monetary policy is still required to stabilize the economy in response to fiscal shocks.