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Active fiscal policy and macroeconomic stability

Author

Listed:
  • Cleiton Silva de Jesus
  • Fernando Motta Correia

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.

Suggested Citation

  • Cleiton Silva de Jesus & Fernando Motta Correia, 2016. "Active fiscal policy and macroeconomic stability," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 43(5), pages 749-762, October.
    • Handle: RePEc:eme:jespps:v:43:y:2016:i:5:p:749-762
    DOI: 10.1108/JES-03-2015-0052
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    Citations

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    Cited by:

    1. Alina Klonowska, 2019. "Barriers for effectiveness of fiscal policy: the case of Poland," Ekonomia i Prawo, Uniwersytet Mikolaja Kopernika, vol. 18(1), pages 29-45, March.
    2. Carlos Eduardo Iwai Drumond & Cleiton Silva Jesus & João Basilio Pereima & Hiroyuki Yoshida, 2022. "Alternative monetary policy rules and expectational consistency," Evolutionary and Institutional Economics Review, Springer, vol. 19(1), pages 319-341, April.

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