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Edwin Le Heron (2008) Fiscal and Monetary Policies in a Keynesian Stock-Flow Consistent model”, in Jerome Creel, Malcolm Sawyer (eds.), Current Thinking on Fiscal Policy, Palgrave MacMillan: London, pp. 145-175
Url: Not available
JEL: C15, E12, E31, E4, E52, E61, E62, G11
Abstract: Following the New Classical Macroeconomics and the New Keynesian Macroeconomics, the independence of central banks significantly increased after 1990, which could preclude the coordination between the fiscal and the monetary policies. The purpose of this paper is to consider the stabilizing effects of fiscal policy within the framework of the new monetary policies implemented by independent central banks.Firstly, we build a Post Keynesian stock-flow consistent (SFC) model with a private banks sector introducing more realistic features. New Keynesian Macroeconomics replaces the three equations of the Keynesian synthesis (IS-LM-Phillips Curve) by three new equations of the new consensus: an IS relation, a Taylor Rule and a New Keynesian Phillips Curve (IS-TR-NKPC). Our Post Keynesian SFC model replaces the IS relation. Secondly, we make simulations by imposing supply shocks (cost push) corresponding to an inflationary shock. The consequences are examined for two kinds of policy mix, for two countries: (i) For country (1), monetary policy is determined by a standard Taylor rule that corresponds to a dual mandate: output gap and inflation gap. Fiscal policy has a countercyclical effect. Broadly speaking, country (1) describes the United States. (ii) For country (2), monetary policy is determined by a ‘truncated’ Taylor rule that corresponds to a unique mandate: inflation gap only. Fiscal policy is neutralized, because we assume that the ratio of the current deficit of the Government (GD) on the GDP is constant and equal to zero, as imposed by the Maastricht Treaty. Broadly speaking, country (2) describes the European Union.