Mika Kortelainen, Douglas Laxton, and Jack Selody
- Published in print:
- 2014
- Published Online:
- September 2015
- ISBN:
- 9780262027182
- eISBN:
- 9780262324113
- Item type:
- chapter
- Publisher:
- The MIT Press
- DOI:
- 10.7551/mitpress/9780262027182.003.0014
- Subject:
- Economics and Finance, Macro- and Monetary Economics
Using the International Monetary Fund's Global Integrated Monetary and Fiscal Model (GIMF), this chapter assesses the effectiveness of expansionary fiscal policy when monetary policy accommodates the ...
More
Using the International Monetary Fund's Global Integrated Monetary and Fiscal Model (GIMF), this chapter assesses the effectiveness of expansionary fiscal policy when monetary policy accommodates the shock, such as was the case in the coordinated fiscal expansion of 2008–2009. After reviewing the literature on activist monetary and fiscal policies, the chapter describes the key features of the economic model in which the policy rules are imbedded. It then introduces simple fiscal policy as a countercyclical tool to show the dynamics of policy coordination and how features such as financial accelerators affect the dynamics of policy coordination. Three scenarios are given: an expansionary fiscal policy when the monetary policy rate has not reached its lower bound, an expansionary fiscal policy when the policy rate is at its lower bound, and an expansionary fiscal policy with the market perception of unsustainable debt. The simulations show that fiscal stimulus is significantly more effective in boosting economic output when the higher real interest rates that it can generate are offset by other policy measures.Less
Using the International Monetary Fund's Global Integrated Monetary and Fiscal Model (GIMF), this chapter assesses the effectiveness of expansionary fiscal policy when monetary policy accommodates the shock, such as was the case in the coordinated fiscal expansion of 2008–2009. After reviewing the literature on activist monetary and fiscal policies, the chapter describes the key features of the economic model in which the policy rules are imbedded. It then introduces simple fiscal policy as a countercyclical tool to show the dynamics of policy coordination and how features such as financial accelerators affect the dynamics of policy coordination. Three scenarios are given: an expansionary fiscal policy when the monetary policy rate has not reached its lower bound, an expansionary fiscal policy when the policy rate is at its lower bound, and an expansionary fiscal policy with the market perception of unsustainable debt. The simulations show that fiscal stimulus is significantly more effective in boosting economic output when the higher real interest rates that it can generate are offset by other policy measures.
Mika Kortelainen, Douglas Laxton, and Jack Selody
- Published in print:
- 2014
- Published Online:
- September 2015
- ISBN:
- 9780262027182
- eISBN:
- 9780262324113
- Item type:
- chapter
- Publisher:
- The MIT Press
- DOI:
- 10.7551/mitpress/9780262027182.003.0021
- Subject:
- Economics and Finance, Macro- and Monetary Economics
Using the International Monetary Fund's Global Integrated Monetary and Fiscal Model (GIMF), this chapter examines how combining fiscal adjustment with structural reform and coordinated fiscal policy ...
More
Using the International Monetary Fund's Global Integrated Monetary and Fiscal Model (GIMF), this chapter examines how combining fiscal adjustment with structural reform and coordinated fiscal policy can reduce public debt, encourage economic growth, and lower global imbalances for all participating countries. It first considers the virtuous circle that can be generated when fiscal consolidation is accompanied by productivity-enhancing structural reform and monetary easing before discussing the specifics of the hypothetical policy actions put into the GIMF and the key features of the model in which the coordinated policy actions are embedded. It then reviews previous studies of the macroeconomic effects of fiscal consolidation. It shows that fiscal consolidation is typically associated with shrinking current-account deficits and slowing growth, but that structural and fiscal reform creates the potential for the world economy to grow while rebalancing global demand. The chapter also illustrates the potential for a virtuous circle to arise.Less
Using the International Monetary Fund's Global Integrated Monetary and Fiscal Model (GIMF), this chapter examines how combining fiscal adjustment with structural reform and coordinated fiscal policy can reduce public debt, encourage economic growth, and lower global imbalances for all participating countries. It first considers the virtuous circle that can be generated when fiscal consolidation is accompanied by productivity-enhancing structural reform and monetary easing before discussing the specifics of the hypothetical policy actions put into the GIMF and the key features of the model in which the coordinated policy actions are embedded. It then reviews previous studies of the macroeconomic effects of fiscal consolidation. It shows that fiscal consolidation is typically associated with shrinking current-account deficits and slowing growth, but that structural and fiscal reform creates the potential for the world economy to grow while rebalancing global demand. The chapter also illustrates the potential for a virtuous circle to arise.
