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Unconventional monetary and fiscal policies in interconnected economies: Do policy rules matter?

Guay Lim () and Paul McNelis ()

Journal of Economic Dynamics and Control, 2018, vol. 93, issue C, 346-363

Abstract: This paper examines the effects of adopting unconventional policies in a crisis environment characterised by the international transmission of negative financial intermediation and real capital quality shocks. Using a two-country model with financial frictions, we compare adjustments in both countries. We condition one country to adopt a credit easing rule as the monetary regime, regardless of the source of the crisis. We consider results when the other country does nothing, or implements a fiscal (tax-rate) policy rule. Our results show that when both countries experience massive asymmetric shocks, the adoption of optimal policy rules can be used effectively to mitigate negative consequences for both economies. However if the crisis events are due to similar shocks, unconventional monetary policy or fiscal policy can improve conditions in own country, whilst worsening economic conditions in the other country, generating beggar-thy-neighbor growth outcomes.

Keywords: Quantitative easing; Financial frictions; Unconventional fiscal policy (search for similar items in EconPapers)
JEL-codes: E44 E58 F38 F41 (search for similar items in EconPapers)
Date: 2018
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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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