Active fiscal policy and macroeconomic stability
Abstract
Purpose
The purpose of this paper is to investigate whether fiscal policy may be a complementary instrument to monetary policy in the macrostabilization process.
Design/methodology/approach
The authors developed a dynamic system with two linear differential equations in order to verify if an active fiscal policy can be compatible with macroeconomic equilibrium in three monetary policy regimes (conservative, alternative and hybrid). The authors also use numerical simulations because it is impossible to extract analytically full conclusions from the theoretical model.
Findings
The results suggest that fiscal policy can be a useful tool for macroeconomic stabilization; the counter-cyclical role of fiscal policy is compatible with dynamic equilibrium only if the monetary authority is not lenient towards inflation; and under an active fiscal policy a hybrid monetary regime is preferable to a conservative one.
Originality/value
This paper offers a theoretical contribution to explicate the macroeconomic implications of fiscal policy.
Keywords
Citation
de Jesus, C.S. and Correia, F.M. (2016), "Active fiscal policy and macroeconomic stability", Journal of Economic Studies, Vol. 43 No. 5, pp. 749-762. https://doi.org/10.1108/JES-03-2015-0052
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited