BoE paper models impact of ‘active’ fiscal policy

“Active” fiscal policy creates a more complicated trade-off for monetary policy-makers but can lead to higher welfare in some circumstances, research published by the Bank of England finds.

In a working paper, Richard Harrison explores cases where the government sets fiscal policy actively, rather than passively adjusting taxes and spending to stabilise the debt stock. He uses a standard New Keynesian model augmented to include long-term government debt.

Active fiscal policy implies an

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