On using monetary policy for macro-economic regulation, after the 1930s Great Depression when effective demand insufficiency emerges, Keynesianism proposes that proactive fiscal and easy monetary policies shall be introduced. His proposal is later adopted in Roosevelt’s New Deal, which greatly help USA climb out of economy recession and achieve prosperity over 20 years. After sub-prime mortgage...

This paper examines under what conditions fiscal policy in the form of government spending should contribute to macroeconomic stabilisation. To this end optimal fiscal targeting rules minimising the microfounded social loss are examined in the following settings. Firstly, for the benchmark New Keynesian model, where monetary policy is unconstrained, a neutrality result for fiscal obtains: fisca...

Since the beginning of 2000s, however, the role of fiscal and monetary policy has started to become more active. Fiscal deficits and public debt levels in EMEs as a whole have declined substantially. Domestic financing has increased, and the share of foreign currency debt has fallen dramatically. And the average public debt maturity has lengthened significantly. What do these developments mean ...

We examine global economic dynamics under learning in a New Keynesian model in which the interest-rate rule is subject to the zero lower bound. Under normal monetary and fiscal policy, the intended steady state is locally but not globally stable. Large pessimistic shocks to expectations can lead to deflationary spirals with falling prices and falling output. To avoid this outcome we recommend a...

In this paper we study macroeconomic stabilization in the Economic and Monetary Union (EMU) using a dynamic game approach. With the aid of a stylized macroeconomic model, this paper analyzes the transmission and interaction of national fiscal policies and monetary policy of the European Central Bank (ECB) in the EMU. A special focus is on the effects of labor market institutions in the particip...

The desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to follow its policies. If it can commit, then debt constraints can only impose costs. If it cannot commit, then fiscal policy has a free-rider problem, and debt constraints may be desirable. This type of free-rider problem is new and arises only because of a time inconsiste...