Inflation Targeting Monetary and Fiscal Policies in a Two-Country Stock-Flow Consistent Model

43 Pages Posted: 14 Jul 2012

See all articles by Matthew Greenwood-Nimmo

Matthew Greenwood-Nimmo

University of Melbourne; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Date Written: July 12, 2012

Abstract

This paper develops a simple two-country stock-flow consistent model based on that of Godley and Lavoie (2007b). In order to motivate the use of stabilisation policies, persistent inflationary pressure and endogenous economic cycles are introduced into the model. Three scenarios are then simulated: a step decrease in real exports from country B, increased wage pressure in country B and an income tax cut in country A. In all cases, monetary and fiscal policies in isolation enjoy little success but a combined monetary and fiscal approach to stabilisation proves highly effective. Moreover, the model suggests that the pursuit of autonomous inflation targeting in each country introduces excessive exchange rate volatility relative to an alternative rule in which one central bank takes a leading role in interest rate setting.

Keywords: Open economy, stock-flow consistency, policy coordination

JEL Classification: E61, E63, F41

Suggested Citation

Greenwood-Nimmo, Matthew, Inflation Targeting Monetary and Fiscal Policies in a Two-Country Stock-Flow Consistent Model (July 12, 2012). Available at SSRN: https://ssrn.com/abstract=2104255 or http://dx.doi.org/10.2139/ssrn.2104255

Matthew Greenwood-Nimmo (Contact Author)

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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