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Fiscal policy as a stabilization instrument

Author

Listed:
  • Giorgio Liotti
Abstract
This paper investigates the role of the fiscal authority in the case in which a negative shock hits the economic system. We analyze the several kinds of behavior that the fiscal authority can adopt during a crisis and show how the various approaches impact upon the effectiveness of fiscal policy. In general, there are two approaches: a) Adopt a neutral behavior or b) Adopt an active behavior in order to stabilize output volatility caused by a slump. Using a constrained minimization process it emerges that the mere use of a monetary policy is ineffective to counteract the crisis, with the risk of keeping the system in a situation in which aggregate demand falls below the potential output. In this context, an expansionary fiscal policy may be crucial to restore the output equilibrium.

Suggested Citation

  • Giorgio Liotti, 2014. "Fiscal policy as a stabilization instrument," Discussion Papers 1_2014, CRISEI, University of Naples "Parthenope", Italy.
    • Handle: RePEc:crj:dpaper:1_2014
    as

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    File URL: http://www.crisei.uniparthenope.it/wp/materiale/crisei_dp_01_2014.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    crisis; fiscal authority; monetary authority; budget deficit; sustainability;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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