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Monetary Policy Rules And The Effects Of Fiscal Policy

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Executive Summary

The authors explore the implications of adopting a Taylor-type interest-rate rule in a simple monetary growth model in which budget deficits are financed partly by unbaked government debt. To ensure uniqueness of the steady-state equilibrium, monetary policy cannot be either too "Active" or too "Passive". The effects of fiscal policy depend crucially on whether monetary policy is active or passive, and are independent of the "Tightness" of monetary policy. The past two decades have witnessed rapid growth in the literature on monetary policy rules.

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