Policy mix under stress: review of economic reactions to fiscal and monetary policies using DSGE

The paper aims to review the studies with a particular emphasis on the response of selected economies to the central bank's monetary policy and the government's fiscal policy during various economic shocks developed using DSGE models. Countries generally have different financial structures, institutional frameworks, and macroeconomic policy transmission mechanisms. The authors better explain why some economies respond more effectively to central bank and government actions than others. The article uses a bibliometric analysis of the policy mix and DSGE, and presents a case study of theoretical policy mix modelling using DSGE. The central bank's monetary policy and the government's fiscal policy play a key role in stabilising the economy. Analysing their impact in different economic conditions allows for identifying optimal strategies depending on the nature of shocks. The study shows that the response of economies to various shocks (e.g., financial crises, pandemics, supply shocks) allows us to assess the effectiveness of stabilisation policies and their long-term consequences. DSGE models, extended with fiscal reaction functions and considering household financial constraints, help us understand how monetary and fiscal policy interactions affect economic fluctuations and inflation. A properly selected combination of monetary and fiscal policy can stabilise the economy. Still, its effectiveness depends on the type of economic shocks and the degree of activity of both policies.