Mixed Monetary-Fiscal Policies and Macroeconomic Fluctuations: An Analysis Based on the Dynamic Stochastic General Equilibrium Model

The existing literature on macroeconomic policy research is mainly concerned with the impact of a single monetary or fiscal policy on China's macroeconomic fluctuations in a closed economy. However, the effect of a mix of monetary and fiscal policies has been neglected. This paper addresses this issue with an open economy dynamic stochastic general equilibrium model. It applies impulse-response and welfare analyses to explore the stabilization effect of various mixes of monetary and fiscal policies. The results show that the optimal monetary policy and fiscal policy mix varies in different cases. When government spending shocks happen, the aggressive fiscal policy and passive monetary policy would be the best choice. In contrast, for domestic interest rate shocks, foreign interest rate shocks, and foreign consumption shocks, the passive fiscal policy and aggressive monetary policy are more applicable. This article explains China's economic fluctuations and highlights the importance of mix of monetary and fiscal policies in the face of different shocks.

Automated summary

The existing literature on macroeconomic policy research primarily focuses on the impact of a single monetary or fiscal policy on China's macroeconomic fluctuations in a closed economy, neglecting the effect of a mix of monetary and fiscal policies. This paper addresses this gap by using an open economy dynamic stochastic general equilibrium model and applying impulse-response and welfare analyses. The results show that the optimal mix of monetary and fiscal policies varies depending on the specific shocks. This article explains China's economic fluctuations and highlights the importance of a mix of monetary and fiscal policies in response to different shocks.