Abstract
What is the most appropriate combination of fiscal and monetary policies in economies subject to banking crises and deep recessions? We study this issue using an agent-based model that is able to reproduce a wide array of macro- and micro-empirical regularities. Simulation results suggest that policy mixes associating unconstrained, counter-cyclical fiscal policy and monetary policy targeting employment is required to stabilise the economy. We also show that "discipline-guided" fiscal rules can be self-defeating, as they depress the economy without improving public finances. Finally, we find that the effects of monetary and fiscal policies become sharper as the level of income inequality increases.
Original language | English |
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Pages (from-to) | 166-189 |
Journal | Journal of Economic Dynamics & Control |
Volume | 52 |
DOIs | |
Publication status | Published - Mar 2015 |
JEL classifications
- c63 - "Computational Techniques; Simulation Modeling"
- e32 - "Business Fluctuations; Cycles"
- e60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
- e52 - Monetary Policy
- g21 - "Banks; Depository Institutions; Micro Finance Institutions; Mortgages"
- o40 - Economic Growth and Aggregate Productivity: General
Keywords
- Agent-based model
- Fiscal policy
- Monetary policy
- Income inequality
- Austerity policies