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Price Stability, Macroeconomic Imbalances and the Role of Monetary Policy

Author

Listed:
  • Ronny Mazzocchi

    (European Parliament)

  • Roberto Tamborini

    (University of Trento)

Abstract

The long period of sustained economic growth with stable inflation had convinced many academics that the right theoretical foundations for macroeconomic policies had been found. However, the Great Financial Crisis (GFC) disputed this view, and many would expect DSGE framework to be declared a dead horse. Yet, over a decade after those critical events, DSGE continues to be the dominant technology of macroeconomic modelling and are still playing an important role in policymaking process. This was possible thanks to the extreme permeability of the DSGE framework to new contributions, in particular on financial frictions, which have emerged in recent years. There is no denying that the progress made by DSGE modelling has fixed many of the weaknesses that were highlighted even before the outbreak of the GFC. However, basic assumptions and procedures still restrict the new framework from dealing with the violation of the intertemporal budget constraints and its effect on macroeconomic stability. This paper presents a dynamic model where investment-saving imbalances are allowed to develop. It introduces different types of feedback interest-rate rules in order to provide some preliminary indications for the conduct of monetary policy.

Suggested Citation

  • Ronny Mazzocchi & Roberto Tamborini, 2025. "Price Stability, Macroeconomic Imbalances and the Role of Monetary Policy," Springer Studies in the History of Economic Thought,, Springer.
    • Handle: RePEc:spr:spshcp:978-3-031-71511-2_4
    DOI: 10.1007/978-3-031-71511-2_4
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