Coordination of Fiscal and Monetary Policies
Coordination of Fiscal and Monetary Policies
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.
Keywords: expansionary fiscal policy, monetary policy, Global Integrated Monetary and Fiscal Model, fiscal expansion, economic model, financial accelerators, policy coordination, fiscal stimulus, economic output, real interest rates
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