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The Fiscal-Monetary Policy Mix and Exchange Rate Stability: A Dynamic Stochastic General Equilibrium Model With Chinese Characteristics

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  • Junxue Jia
  • Jing Guo
  • Zijie Wang

Abstract

We develop a small open economy model and compare alternative fiscal-monetary policy mixes using data for China. We show that the trade-offs faced by policy makers involve not only the stabilization of output, inflation, and real exchange rates, but also government debt stability. The source of shocks has important implications for the trade-offs. In the face of external shocks to interest rates or inflation, a passive fiscal and active monetary policy mix performs well in stabilizing government liabilities, inflation, and real exchange rates but generates higher output volatility. An active fiscal and active monetary policy mix is much more stabilizing in response to internal shocks to government expenditures or sector-specific productivity.

Suggested Citation

  • Junxue Jia & Jing Guo & Zijie Wang, 2015. "The Fiscal-Monetary Policy Mix and Exchange Rate Stability: A Dynamic Stochastic General Equilibrium Model With Chinese Characteristics," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 51(4), pages 729-746, July.
    • Handle: RePEc:mes:emfitr:v:51:y:2015:i:4:p:729-746
    DOI: 10.1080/1540496X.2015.1046345
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    Cited by:

    1. Yang‐Chao Wang & Jui‐Jung Tsai & Shushu Li & Yiying Huang, 2023. "The impacts of RMB internationalization on onshore and offshore RMB markets," International Review of Finance, International Review of Finance Ltd., vol. 23(3), pages 502-523, September.
    2. , Le Thanh Tung, 2022. "How Do Fiscal-Monetary Policies Affect Economic Growth? The Case Of Vietnam," OSF Preprints nhfqg, Center for Open Science.
    3. Roger Alejandro Banegas Rivero & Marco Alberto Nunez Ramirez & Sacnicte Valdez Del Rio, 2021. "Interaction of Economic Policy. Lessons on Social Welfare and Risk Premium," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 17(1), pages 7-29.
    4. Liu, Ding & Sun, Weihong & Chang, Long, 2021. "Monetary–fiscal policy regime and macroeconomic dynamics in China," Economic Modelling, Elsevier, vol. 95(C), pages 121-135.
    5. Ma, Yong, 2016. "Nonlinear monetary policy and macroeconomic stabilization in emerging market economies: Evidence from China," Economic Systems, Elsevier, vol. 40(3), pages 461-480.
    6. Dat Thanh Nguyen & Viet Anh Hoang, 2020. "Monetary Consequences of Fiscal Stress in a Game Theoretic Framework," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 125-164.

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