The Taylor principle in a New Keynesian model with capital accumulation, government debt dynamics and non-Ricardian consumers

This paper develops a small, analytically tractable New Keynesian model with capital accumulation and government debt dynamics. We show that, in the absence of Ricardian equivalence, the latter channel is of conceptual importance for the design of monetary and Þscal policy rules consistent with determinate equilibrium dynamics. Our model can be used to see how deviations from Ricardian equivalence lead to potentially signiÞcant modiÞcations in the design of such rules, compared with a New Keynesian benchmark economy in which Þscal policy typically plays no prominent role. Using a Blanchard-Yaari structure, non-Ricardian features of our economy result from intertemporally ‘disconnected’ decisions of consumers. This friction is policy-invariant, which distinguishes our approach from recent contributions by Woodford.