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Unconventional monetary and fiscal policies in interconnected economies: Do policy rules matter?

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  • Lim, G.C.
  • McNelis, Paul D.

Abstract

This paper examines the effects of adopting unconventional policies in a crisis environment characterised by the international transmission of negative financial intermediation and real capital quality shocks. Using a two-country model with financial frictions, we compare adjustments in both countries. We condition one country to adopt a credit easing rule as the monetary regime, regardless of the source of the crisis. We consider results when the other country does nothing, or implements a fiscal (tax-rate) policy rule. Our results show that when both countries experience massive asymmetric shocks, the adoption of optimal policy rules can be used effectively to mitigate negative consequences for both economies. However if the crisis events are due to similar shocks, unconventional monetary policy or fiscal policy can improve conditions in own country, whilst worsening economic conditions in the other country, generating beggar-thy-neighbor growth outcomes.

Suggested Citation

  • Lim, G.C. & McNelis, Paul D., 2018. "Unconventional monetary and fiscal policies in interconnected economies: Do policy rules matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 346-363.
  • Handle: RePEc:eee:dyncon:v:93:y:2018:i:c:p:346-363
    DOI: 10.1016/j.jedc.2018.01.028
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    References listed on IDEAS

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    More about this item

    Keywords

    Quantitative easing; Financial frictions; Unconventional fiscal policy;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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