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Policy Lag and Sustained Growth

Author

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  • Shunsuke Shinagawa

    (Kanagawa University)

  • Eiji Tsuzuki

    (Nanzan University)

Abstract

This study provides a theoretical analysis of economic stability when a fiscal policy lag and sustained economic growth coexist. We develop a New Keynesian model by introducing economic growth based on an exogenous factor and a fiscal policy rule with a delay in policy reaction. We clarify the effect of these factors on economic stability by performing a dynamic analysis of the delay-differential equation system derived from the developed model. Our study has several contributions. First, this study contributes an analysis of the effect of a policy lag on stability. When the economy does not grow, a large policy lag destabilizes the economy. However, in a sustainably growing economy, a large policy lag may eliminate instability and contribute to economic stability. Second, we show that a change in the economic growth rate can affect economic stability under a policy lag. This new finding runs contrary to the usual results from growth models without a policy lag.

Suggested Citation

  • Shunsuke Shinagawa & Eiji Tsuzuki, 2019. "Policy Lag and Sustained Growth," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 5(3), pages 403-431, October.
    • Handle: RePEc:spr:italej:v:5:y:2019:i:3:d:10.1007_s40797-019-00092-1
    DOI: 10.1007/s40797-019-00092-1
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    More about this item

    Keywords

    New Keynesian model; Policy lag; Delay-differential equation; Equilibrium determinacy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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