Fiscal and monetary policy rules in an unstable economy

Arbeitspapier

This paper examines the implications of different monetary and fiscal policy rules in an economy characterized by Harrodian instability. We show that (i) a monetary rule along Taylor lines can be stabilizing for low debt ratios but becomes de-stabilizing if the debt ratio exceeds a certain threshold, (ii) a 'Keynesian' fiscal policy rule can stabilize the economy at full employment, (iii) a fiscal 'austerity' rule that links fiscal parameters to deviations from a target debt ratio fails to adjust the `warranted' to the 'natural' growth rate and destabilizes the warranted path, (iv) instability may arise from a combination of fiscal and monetary policy rules which separately would stabilize the system, and (v) austerity rules can in some circumstances enhance the stabilizing effects of monetary policy.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2015-15

Classification and Topics

• Classification: Wirtschaft ; General Aggregative Models: Keynes; Keynesian; Post-Keynesian ; Monetary Policy ; Fiscal Policy ; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
• Subject: functional finance ; fiscal policy rule ; austerity ; public debt ; Harrodian instability

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ryoo, Soon ; Skott, Peter
• Event: Veröffentlichung
• (who): University of Massachusetts, Department of Economics
• (where): Amherst, MA
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/174388
• Last update: 10.03.2025, 11:45 AM CET