Fiscal and monetary policy rules in an unstable economy

Soon Ryoo and Peter Skott

No 2015-15, UMASS Amherst Economics Working Papers from University of Massachusetts Amherst, Department of Economics

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.

Keywords: functional finance; fiscal policy rule; austerity; public debt; Harrodian instability (search for similar items in EconPapers)
JEL-codes: E12 E52 E62 E63 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pke
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Citations: View citations in EconPapers (3)

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Journal Article: Fiscal and Monetary Policy Rules in an Unstable Economy (2017)
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