Home  Journals  Economic Analysis: Theory and Practice  10(469) - 2017 October

Modeling the search for tolerant-to-uncertainty monetary and fiscal policies under their interaction

Vol. 16, Iss. 10, OCTOBER 2017

Article PDF Version

Received: 2 December 2016

Received in revised form: 7 February 2017

Accepted: 4 October 2017

Available online: 27 October 2017

Subject Heading: MATHEMATICAL METHODS AND MODELS

JEL Classification: E17, E52, E61

Pages: 1972–1988

https://doi.org/10.24891/ea.16.10.1972

Importance Searching for fiscal and monetary policies that tolerate uncertainty and do not lead to negative implications under any possible distortion of economic model's specifications is particularly relevant in dynamic model development. The article explores the effect of the degree of interaction between the central bank and the government on policy stability, using a neo-Keynesian model.
Objectives The aims are to analyze fiscal and monetary policies from the perspective of their robustness to non-structural uncertainties under interactions between monetary and fiscal authorities when developing both a commitment-based policy and a discretionary policy; to provide recommendations for designing a policy that would be tolerant to non-structural uncertainties.
Methods The study employs economic and mathematical methods and computer simulation techniques.
Results I found that a coordinated interaction between fiscal and monetary authorities when developing both a commitment-based policy and a discretionary policy is effective only when the central bank has greater bargaining power. This is true for a model with the worst-case scenario and for a model with tolerant-to-uncertainty policy. For a regime with commitments, the increasing domination of the government results in the distortion of the response of government spending to inflation shock. Under a discretionary policy, the increasing domination of the government in interactions with the central bank reduces the role of distortions introduced to the standard model.
Conclusions The findings on developing a policy that is tolerant to non-structural uncertainties should be considered in the analysis of monetary and fiscal policies in macroeconomic dynamic models.

Keywords: robustness, fiscal policy, monetary policy, non-structural uncertainty

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