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Fiscal and Monetary Policies in a Keynesian Stock-Flow Consistent Model

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  • Edwin Le Heron

    (Sciences Po, Bordeaux, France)

Abstract

Following the New Classical Macroeconomics and the New Keynesian Macroeconomics, the independence of central banks significantly increased after 1990, which could preclude the coordination between the fiscal and the monetary policies. The purpose of this paper is to consider the stabilizing effects of fiscal policy within the framework of the new monetary policies implemented by independent central banks.Firstly, we build a Post Keynesian stock-flow consistent (SFC) model with a private banks sector introducing more realistic features. New Keynesian Macroeconomics replaces the three equations of the Keynesian synthesis (IS-LM-Phillips Curve) by three new equations of the new consensus: an IS relation, a Taylor Rule and a New Keynesian Phillips Curve (IS-TR-NKPC). Our Post Keynesian SFC model replaces the IS relation. Secondly, we make simulations by imposing supply shocks (cost push) corresponding to an inflationary shock. The consequences are examined for two kinds of policy mix, for two countries: (i) For country (1), monetary policy is determined by a standard Taylor rule that corresponds to a dual mandate: output gap and inflation gap. Fiscal policy has a countercyclical effect. Broadly speaking, country (1) describes the United States. (ii) For country (2), monetary policy is determined by a ‘truncated’ Taylor rule that corresponds to a unique mandate: inflation gap only. Fiscal policy is neutralized, because we assume that the ratio of the current deficit of the Government (GD) on the GDP is constant and equal to zero, as imposed by the Maastricht Treaty. Broadly speaking, country (2) describes the European Union.

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Bibliographic Info

Paper provided by GEMF - Faculdade de Economia, Universidade de Coimbra in its series GEMF Working Papers with number 2009-01.

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Length: 32 pages
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:gmf:wpaper:2009-01

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Keywords: Monetary policy; fiscal policy; stock- flow consistent model; post-keynesian macroeconomics;

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References

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  1. Claudio H. dos Santos & Gennaro Zezza, 2004. "A Post-Keynesian Stock-Flow Consistent Macroeconomic Growth Model: Preliminary Results," Economics Working Paper Archive wp_402, Levy Economics Institute.
  2. Morris A. Davis & Michael G. Palumbo, 2001. "A primer on the economics and time series econometrics of wealth effects," Finance and Economics Discussion Series 2001-09, Board of Governors of the Federal Reserve System (U.S.).
  3. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
  4. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  5. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  6. Marvin Goodfriend & Robert G. King, 2001. "The case for price stability," Working Paper 01-02, Federal Reserve Bank of Richmond.
  7. Fabrice Capoen & Jerome Creel, 2007. "Efficiency of stability-oriented institutions: the European case," Documents de Travail de l'OFCE 2007-06, Observatoire Francais des Conjonctures Economiques (OFCE).
  8. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  9. Skander Van den Heuvel, 2006. "The Bank Capital Channel of Monetary Policy," 2006 Meeting Papers 512, Society for Economic Dynamics.
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Cited by:
  1. Eugenio Caverzasi & Antoine Godin, 2013. "Stock-flow Consistent Modeling through the Ages," Economics Working Paper Archive wp_745, Levy Economics Institute.

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