Rethinking Macroeconomic Policy within a Simple Dynamic Model

42 Pages Posted: 18 Dec 2015

See all articles by Isabel Almudi

Isabel Almudi

University of Zaragoza

Francisco Fatás-Villafranca

University of Zaragoza

Gloria Jarne

University of Zaragoza

Julio Sánchez Chóliz

University of Zaragoza

Multiple version iconThere are 2 versions of this paper

Date Written: October 15, 2015

Abstract

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

Almudi, Isabel and Fatás-Villafranca, Francisco and Jarne, Gloria and Chóliz, Julio Sánchez, Rethinking Macroeconomic Policy within a Simple Dynamic Model (October 15, 2015). Available at SSRN: https://ssrn.com/abstract=2704583 or http://dx.doi.org/10.2139/ssrn.2704583

Isabel Almudi (Contact Author)

University of Zaragoza ( email )

Gran Via 2
Zaragoza, 50005
Spain

Francisco Fatás-Villafranca

University of Zaragoza ( email )

Zaragoza, 50005
Spain

Gloria Jarne

University of Zaragoza ( email )

Gran Via 2
Zaragoza, 50005
Spain

Julio Sánchez Chóliz

University of Zaragoza ( email )

Gran Via 2
Zaragoza, 50005
Spain

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