Fiscal and Monetary Policies in a Keynesian Stock-Flow Consistent Model

Edwin Le Heron

No 2009-01, GEMF Working Papers from GEMF, Faculty of Economics, University of Coimbra

Abstract: Following the New Classical Macroeconomics and the New Keynesian Macroeconomics, the independence of central banks significantly increased after 1990, which could preclude the coordination between the fiscal and the monetary policies. The purpose of this paper is to consider the stabilizing effects of fiscal policy within the framework of the new monetary policies implemented by independent central banks.Firstly, we build a Post Keynesian stock-flow consistent (SFC) model with a private banks sector introducing more realistic features. New Keynesian Macroeconomics replaces the three equations of the Keynesian synthesis (IS-LM-Phillips Curve) by three new equations of the new consensus: an IS relation, a Taylor Rule and a New Keynesian Phillips Curve (IS-TR-NKPC). Our Post Keynesian SFC model replaces the IS relation. Secondly, we make simulations by imposing supply shocks (cost push) corresponding to an inflationary shock. The consequences are examined for two kinds of policy mix, for two countries: (i) For country (1), monetary policy is determined by a standard Taylor rule that corresponds to a dual mandate: output gap and inflation gap. Fiscal policy has a countercyclical effect. Broadly speaking, country (1) describes the United States. (ii) For country (2), monetary policy is determined by a truncated Taylor rule that corresponds to a unique mandate: inflation gap only. Fiscal policy is neutralized, because we assume that the ratio of the current deficit of the Government (GD) on the GDP is constant and equal to zero, as imposed by the Maastricht Treaty. Broadly speaking, country (2) describes the European Union.

Keywords: Monetary policy; fiscal policy; stock- flow consistent model; post-keynesian macroeconomics (search for similar items in EconPapers)
JEL-codes: C15 E12 E31 E4 E52 E61 E62 G11 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2009-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Fiscal and Monetary Policies in a Keynesian Stock-flow Consistent Model (2009)
Working Paper: Fiscal and Monetary Policies in a Keynesian Stock-flow Consistent Model (2008)
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