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The Interaction between Monetary and Fiscal Policies in a Small Scale Structural Model

Author

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  • Tayyar Buyukbasaran
  • Cem Cebi
  • Hande Kucuk

Abstract

[EN] Taking the monetary policy framework as given, this study investigates how inflation volatility, output gap volatility and social welfare are affected in an environment where fiscal policy is designed with an aim to minimize the volatility in inflation and output gap as well as stabilizing debt. In this respect, we use the small-scale structural model of cebi (2012) and obtain fiscal policy rules under different loss functions. We find that fiscal policy rules that minimize the loss function which gives more importance to the volatility of inflation and that of output gap produces lower volatility in inflation and output gap compared to other loss functions, which mainly focus on debt stabilization and output gap stabilization. Furthermore, fiscal rule parameters derived using the loss functions that prioritize debt stabilization and output gap volatility are far from the efficiency frontier. [TR] Bu calismada, para politikasi cercevesi veriyken, maliye politikasinin borc istikrari saglamanin yani sira enflasyon ve cikti acigindaki dalgalanmalari en aza indirgeme amaci dogrultusunda olusturuldugu bir durumda, enflasyon ve cikti acigi oynakligi ile sosyal refahin nasil etkilendigi incelenmistir. Bu cercevede, Cebi (2012) calismasinda ortaya konulan kucuk olcekli yapisal model kullanilarak cesitli kayip fonksiyonlari altinda maliye politikasi kurallari elde edilmistir. Calismada, enflasyon ve cikti acigindaki oynakliga daha cok onem veren maliye politikasi kayip fonksiyonunun esas olarak borc istikrarina ya da cikti acigi istikrarina onem veren kayip fonksiyonlarina gore enflasyon ve cikti acigindaki oynakligi dusurmede daha basarili oldugu gozlenmistir. Ayrica, yalnizca borc istikrari ya da cikti acigi istikrarini onceliklendiren maliye politikasi uygulamalarinin enflasyon ve cikti acigindaki oynakligi azaltma noktasinda etkinlik sinirinin uzaginda kaldigi tespit edilmistir.

Suggested Citation

  • Tayyar Buyukbasaran & Cem Cebi & Hande Kucuk, 2018. "The Interaction between Monetary and Fiscal Policies in a Small Scale Structural Model," CBT Research Notes in Economics 1815, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    • Handle: RePEc:tcb:econot:1815
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    References listed on IDEAS

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    1. Gali­, Jordi & Monacelli, Tommaso, 2008. "Optimal monetary and fiscal policy in a currency union," Journal of International Economics, Elsevier, vol. 76(1), pages 116-132, September.
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    1. Scobie, Grant M, 2020. "If Bill Phillips were Governor ...? Some implications of his work for contemporary macroeconomic policy," Working Paper Series 21096, Victoria University of Wellington, Chair in Public Finance.

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