Fiscal and Monetary Policy Rules in a Keynesian Model of Monetary Growth

Abstract

SummaryIn this paper we investigate whether a Keynesian fiscal policy rule or an orthodox (Classical) one is more successful in stabilizing the dynamics of a complete Keynesian model of monetary growth with an elaborate wage-price sector (and an endogenously determined natural rate of employment). The tendencial result is that both fiscal policy rules can be successfully applied (within certain limits) in cases, where the steady state of the economy’s private sector is already locally asymptotically stable. In the opposite case of an unstable private sector — where instability is caused by a very high adjustment speed of prices — only a Keynesian fiscal policy is capable of bringing stability to the economy.