Long Term Effects of Fiscal and Monetary Policy in a Stock-Flow-Consistent Macro-Framework

Abstract

Some fundamental issues of fiscal and monetary policy are discussed within a stock-flow-consistent macroeconomic framework for an open economy. The core of the model is the financial sector with both a capital market and a money market and correspondingly differing interest rates. Further key elements are households which maximize an inter-temporal utility function with respect to both consumption and wealth, profit maximizing firms subject to a production function with decreasing returns to scale, and government expenses funded by both taxes and public debt. Concerning monetary policy, different regimes are discussed, including monetary abstinence, quantitative easing, and monetizing public debt. Typical Keynesian policy measures such as rising wages, expansionary monetary policy, and public deficit spending are also discussed. The main focus is on long term effects of these measures, with the dynamics being only briefly sketched. Because the model is entirely solvable analytically, it may also be useful as a means of didactics. (E10, E40, E50)