2016/06/16 by Soon Ryoo, Peter Skott
paper · doi:10.1111/meca.12139
crossref issued 2016/06/16 · crossref published 2016/06/16 · crossref published-online 2016/06/16 · crossref created 2016/06/17 · crossref published-print 2017/07/01 · crossref deposited 2023/09/23 · crossref indexed 2026/07/26
Abstract This paper examines the implications of different monetary and fiscal policy rules in an economy characterized by Harrodian instability. We show that (1) 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, (2) a ‘Keynesian’ fiscal policy rule can stabilize the economy at full employment, (3) 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 and (4) instability may arise from a combination of fiscal and monetary policy rules which separately would stabilize the system.