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Fiscal and monetary policy rules in an unstable economy

Author

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  • Ryoo, Soon

    () (Department of Finance and Economics, Adelphi University)

  • Skott, Peter

    () (Department of Economics, University of Massachusetts, Amherst, MA 01003,USA, and Aalborg University)

Abstract

This paper examines the implications of different monetary and fiscal policy rules in an economy characterized by Harrodian instability. We show that (i) a monetary rule along Taylor lines can be stabilizing for low debt ratios but becomes de-stabilizing if the debt ratio exceeds a certain threshold, (ii) a `Keynesian' fiscal policy rule can stabilize the economy at full employment, (iii) a fiscal `austerity' rule that links fiscal parameters to deviations from a target debt ratio fails to adjust the `warranted' to the `natural' growth rate and destabilizes the warranted path, (iv) instability may arise from a combination of fiscal and monetary policy rules which separately would stabilize the system, and (v) austerity rules can in some circumstances enhance the stabilizing effects of monetary policy.

Suggested Citation

  • Ryoo, Soon & Skott, Peter, 2015. "Fiscal and monetary policy rules in an unstable economy," UMASS Amherst Economics Working Papers 2015-15, University of Massachusetts Amherst, Department of Economics.
  • Handle: RePEc:ums:papers:2015-15
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    Cited by:

    1. Peter Skott, 2016. "Aggregate demand, functional finance, and secular stagnation," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 13(2), pages 172-188, September.
    2. repec:zbw:ifweej:20187 is not listed on IDEAS
    3. Skott, Peter & Ryoo, Soon, 2015. "Functional finance and intergenerational distribution in a Keynesian OLG model," UMASS Amherst Economics Working Papers 2015-13, University of Massachusetts Amherst, Department of Economics.

    More about this item

    Keywords

    functional finance; fiscal policy rule; austerity; public debt; Harrodian instability;

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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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