Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/174388
Authors: 
Ryoo, Soon
Skott, Peter
Year of Publication: 
2015
Series/Report no.: 
Working Paper 2015-15
Abstract: 
This paper examines the implications of different monetary and fiscal policy rules in an economy characterized by Harrodian instability. We show that (i) a monetary rule along Taylor lines can be stabilizing for low debt ratios but becomes de-stabilizing if the debt ratio exceeds a certain threshold, (ii) a 'Keynesian' fiscal policy rule can stabilize the economy at full employment, (iii) a fiscal 'austerity' rule that links fiscal parameters to deviations from a target debt ratio fails to adjust the `warranted' to the 'natural' growth rate and destabilizes the warranted path, (iv) instability may arise from a combination of fiscal and monetary policy rules which separately would stabilize the system, and (v) austerity rules can in some circumstances enhance the stabilizing effects of monetary policy.
Subjects: 
functional finance
fiscal policy rule
austerity
public debt
Harrodian instability
JEL: 
E12
E52
E62
E63
Document Type: 
Working Paper

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