Stabilizing an unstable economy: Fiscal and monetary policy, stocks, and the term structure of interest rates

Publication year: 2011
Source: Economic Modelling, Volume 28, Issue 5, September 2011, Pages 2129-2136

Matthieu, Charpe , Peter, Flaschel , Florian, Hartmann , Christian, Proaño

Monetary and fiscal policy measures have been applied in order to avert the financial market collapse and counteract the global recession. In this paper we present an integrated macromodel which in particular focuses on the financial markets. We use a Tobin-like macroeconomic portfolio approach, and the interaction of heterogeneous agents on the financial market to characterize the potential for financial market instability. We show that specific but unorthodox fiscal and monetary policies have to be used to stabilize such unstable macroeconomies.

 Research highlights: ► Integrated macro model which focuses on the financial markets. ► Dynamic Tobin-like portfolio approach. ► Interaction of heterogeneous agents in the financial markets. ► Potential sources of macroeconomic instability. ► Unorthodox fiscal and monetary policies to stabilize unstable macroeconomies