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Active fiscal policy and macroeconomic stability

Active fiscal policy and macroeconomic stability PurposeThe purpose of this paper is to investigate whether fiscal policy may be a complementary instrument to monetary policy in the macrostabilization process.Design/methodology/approachThe authors developed a dynamic system with two linear differential equations in order to verify if an active fiscal policy can be compatible with macroeconomic equilibrium in three monetary policy regimes (conservative, alternative and hybrid). The authors also use numerical simulations because it is impossible to extract analytically full conclusions from the theoretical model.FindingsThe results suggest that fiscal policy can be a useful tool for macroeconomic stabilization; the counter-cyclical role of fiscal policy is compatible with dynamic equilibrium only if the monetary authority is not lenient towards inflation; and under an active fiscal policy a hybrid monetary regime is preferable to a conservative one.Originality/valueThis paper offers a theoretical contribution to explicate the macroeconomic implications of fiscal policy. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Studies Emerald Publishing

Active fiscal policy and macroeconomic stability

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References (16)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0144-3585
DOI
10.1108/JES-03-2015-0052
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to investigate whether fiscal policy may be a complementary instrument to monetary policy in the macrostabilization process.Design/methodology/approachThe authors developed a dynamic system with two linear differential equations in order to verify if an active fiscal policy can be compatible with macroeconomic equilibrium in three monetary policy regimes (conservative, alternative and hybrid). The authors also use numerical simulations because it is impossible to extract analytically full conclusions from the theoretical model.FindingsThe results suggest that fiscal policy can be a useful tool for macroeconomic stabilization; the counter-cyclical role of fiscal policy is compatible with dynamic equilibrium only if the monetary authority is not lenient towards inflation; and under an active fiscal policy a hybrid monetary regime is preferable to a conservative one.Originality/valueThis paper offers a theoretical contribution to explicate the macroeconomic implications of fiscal policy.

Journal

Journal of Economic StudiesEmerald Publishing

Published: Oct 10, 2016

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