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Fiscal and Monetary Policy in a New Keynesian Model with Tobin’s Q Investment Theory Features

Giannoulakis, Stylianos (2017): Fiscal and Monetary Policy in a New Keynesian Model with Tobin’s Q Investment Theory Features.

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Abstract

The purpose of this article is to carefully lay out the internal monetary and fiscal transmission mechanisms in the context of a New Keynesian model, with a particular focus on the role of capital - the most vital ingredient in the transition from the basic framework to the medium - scale DSGE models. The key concept of this paper is the form of the monetary policy: we assume a two-channel monetary policy, i.e. it is conducted through a rule for money supply and a Taylor-type rule for interest rates, in order to keep up with the ECB and Fed’s policies. We also adopt a simple fiscal policy rule for public consumption to examine the interactions between fiscal and monetary policy. Finally, in order to capture the crisis effects we introduce exogenous shocks to both monetary and fiscal policy rules.

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