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Fiscal policy as a stabilization instrument

Giorgio Liotti ()

Discussion Papers from CRISEI, University of Naples "Parthenope", Italy

Abstract: This paper investigates the role of the fiscal authority in the case in which a negative shock hits the economic system. We analyze the several kinds of behavior that the fiscal authority can adopt during a crisis and show how the various approaches impact upon the effectiveness of fiscal policy. In general, there are two approaches: a) Adopt a neutral behavior or b) Adopt an active behavior in order to stabilize output volatility caused by a slump. Using a constrained minimization process it emerges that the mere use of a monetary policy is ineffective to counteract the crisis, with the risk of keeping the system in a situation in which aggregate demand falls below the potential output. In this context, an expansionary fiscal policy may be crucial to restore the output equilibrium.

Keywords: crisis; fiscal authority; monetary authority; budget deficit; sustainability (search for similar items in EconPapers)
JEL-codes: E61 E63 (search for similar items in EconPapers)
Date: 2014-06-01
New Economics Papers: this item is included in nep-mac
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