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Designing fiscal stabilization rules

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  • Shahnazarian, Hovick

Abstract

This paper uses a reduced-form New-Keynesian model to derive fiscal stabilization rules across non-cooperative (fiscal or monetary leadership and simultaneous-move games), cooperative, and social planner regimes, with particular attention to effective lower bound (ELB) constraint. Our analysis demonstrates that, in countries where monetary policy is delegated to independent central banks, fiscal leadership serves as a practical second-best solution for stabilization, particularly when other policy interaction regimes are less effective, especially under binding ELB conditions. These findings underscore the crucial role of fiscal policy in overcoming monetary policy constraints and provide actionable insights for policymakers designing stabilization strategies within institutional limitations.

Suggested Citation

  • Shahnazarian, Hovick, 2025. "Designing fiscal stabilization rules," Economic Analysis and Policy, Elsevier, vol. 87(C), pages 1436-1451.
    • Handle: RePEc:eee:ecanpo:v:87:y:2025:i:c:p:1436-1451
    DOI: 10.1016/j.eap.2025.07.007
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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