Rethinking Macroeconomic Policy within a Simple Dynamic Model
42 Pages Posted: 18 Dec 2015
Date Written: October 15, 2015
We propose a simple macrodynamic model to rethink some standard policy prescriptions. Our model includes exogenous growth, endogenous investment, demand-driven production and employment, a dynamic Phillips curve, and fiscal and monetary policy instruments. The model has multiple steady states with different stability properties, and it is analytically tractable to a significant extent. Given the nonlinear nature of the model, we complete the analytical results with simulations. The model generates different growth patterns, endogenous fluctuations, and demand-driven level effects even in the long-run. It also reveals saddle-path type instabilities in which seemingly stable paths suddenly give way to increasing volatility. These results lead us to reflect on fiscal and monetary policy standards, and suggest new interpretations for the “Great Recession”.
Keywords: Macroeconomic Models, Macroeconomic Policy, Great Recession, Great Moderation, Dynamics
JEL Classification: C02, E10, E69
Suggested Citation: Suggested Citation