Combination Monetary Feedback Rule Affects Output

The effectiveness of combination monetary feedback rule and fiscal policy under rational expectations is examined. The fiscal policy takes into account not only a progressive tax structure but also government expenditure. The model consists of IS and LM relationships and a Lucas supply function. The model is solved analytically. Both the progressive tax structure and the combination monetary feedback provide an automatic but not immediate adjustment to reduce the expectation error. Therefore the behaviour of real output is influenced not only by the disturbance terms but also by the policy parameters of the progressive tax structure and the combination monetary feedback rule.