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Complex interplay between monetary and fiscal policies in a real economy model

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  • Fausto Cavalli
  • Ahmad Naimzada
  • Nicolò Pecora

Abstract

In this paper we consider a nonlinear model for the real economy described by a multiplieraccelerator setup. The model comprises the government sector, which influences the output dynamics by means of the fiscal policy, and the money market, where the money supply depends upon the fluctuations in the economic activity. Through rigorous analytical tools combined with numerical simulations, we investigate the stability conditions of the unique steady state and the emergence of different kinds of endogenous dynamics, which are the results of the fraction of the fiscal and the monetary policy through their reactivity degrees. Such policies, if properly tuned, can lead the economy toward the desired full employment target but, on the other hand, can also generate endogenous fluctuations in the pace of the economic activity, associated with the occurrence of closed invariant curves and multistability phenomena.

Suggested Citation

  • Fausto Cavalli & Ahmad Naimzada & Nicolò Pecora, 2019. "Complex interplay between monetary and fiscal policies in a real economy model," Working Papers 409, University of Milano-Bicocca, Department of Economics, revised May 2019.
    • Handle: RePEc:mib:wpaper:409
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    Cited by:

    1. Sordi, Serena & Dávila-Fernández, Marwil J., 2022. "A two-stroke growth cycle model for a small open economy," Chaos, Solitons & Fractals, Elsevier, vol. 163(C).
    2. Kejriwal, Saransh & Sheth, Sarjan & Silpa, P.S. & Sarkar, Sumit & Guha, Apratim, 2022. "Attaining herd immunity to a new infectious disease through multi-stage policies incentivising voluntary vaccination," Chaos, Solitons & Fractals, Elsevier, vol. 154(C).

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    Keywords

    nonlinear dynamics; monetary and fiscal policies; bifurcations; multistability.;
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