Maintaining a Golden Age Demand Shock Simulations in a Fixed Coefficient Production Economy wih a Government Sector and a Target Public Debt Ratio

Abstract

In this paper I modify a model originally laid out by Thomas Michl to include endogenous government spending, saving decisions and also alter it with the inclusion of a modified Taylor rule. The tax-ratio instrument employed in the original model is tested and found to be effective at bringing stability to the economy. Demand shocks are then applied to the modified models and I conclude that, as with the original model, more than just a common fiscal response function is needed to prevent a deflation trap. The inclusion of the original form of the Taylor rule results in a slower return to a steady state debt level but results in lower long-run inflation.