Policy Lag and Sustained Growth

Shunsuke Shinagawa () and Eiji Tsuzuki ()
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Shunsuke Shinagawa: Kanagawa University
Eiji Tsuzuki: Nanzan University

Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, 2019, vol. 5, issue 3, No 4, 403-431

Abstract: Abstract This study provides a theoretical analysis of economic stability when a fiscal policy lag and sustained economic growth coexist. We develop a New Keynesian model by introducing economic growth based on an exogenous factor and a fiscal policy rule with a delay in policy reaction. We clarify the effect of these factors on economic stability by performing a dynamic analysis of the delay-differential equation system derived from the developed model. Our study has several contributions. First, this study contributes an analysis of the effect of a policy lag on stability. When the economy does not grow, a large policy lag destabilizes the economy. However, in a sustainably growing economy, a large policy lag may eliminate instability and contribute to economic stability. Second, we show that a change in the economic growth rate can affect economic stability under a policy lag. This new finding runs contrary to the usual results from growth models without a policy lag.

Keywords: New Keynesian model; Policy lag; Delay-differential equation; Equilibrium determinacy (search for similar items in EconPapers)
JEL-codes: E32 E52 E62 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s40797-019-00092-1

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