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Achieving a Soft Landing: The Role of Fiscal Policy

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Author Info
Daniel Leigh
Abstract

This paper utilizes an open-economy New Keynesian overlapping generations model to assess the extent to which fiscal policy, along side an inflation-forecast-based monetary policy, could enhance macroeconomic stability in Colombia. The model simulations indicate that, in addition to stabilizing output and inflation, a stronger response of the fiscal balance to excess tax revenue would reduce the burden on the central bank of adjusting interest rates, lessen the associated degree of exchange rate volatility, and contribute to a more stable external current account balance. The analysis also assesses how the success of fiscal policy in enhancing macroeconomic stability depends on the type of shock, the response of monetary policy, and the length of fiscal policy implementation lags.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/69.

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Length: 23 pages
Date of creation: 21 Mar 2008
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Handle: RePEc:imf:imfwpa:08/69

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Keywords: Fiscal policy Colombia Monetary policy Business cycles Tax revenues

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  1. Christina D. Romer & David H. Romer, 2007. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," NBER Working Papers 13264, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," NBER Working Papers 13580, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Frederic S. Mishkin, 2007. "Will Monetary Policy Become More of a Science?," NBER Working Papers 13566, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization Of The Dynamic Effects Of Changes In Government Spending And Taxes On Output," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1329-1368, November. [Downloadable!] (restricted)
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  5. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions be Expansionary? Tales of Two Small European Countries," NBER Working Papers 3372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Peter Rowland & José Luis Torres Trespalacios, 2004. "Determinants Of Spread And Creditworthiness For Emerging Market Sovereign Debt: A Panel Data Study," BORRADORES DE ECONOMIA 002337, BANCO DE LA REPÚBLICA. [Downloadable!]
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  7. Frederic S. Mishkin, 2007. "Will monetary policy become more of a science?," Finance and Economics Discussion Series 2007-44, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  8. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June. [Downloadable!] (restricted)
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  9. Michael Kumhof & Douglas Laxton, 2007. "A Party without a Hangover? On the Effects of U.S. Government Deficits," IMF Working Papers 07/202, International Monetary Fund. [Downloadable!]
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