Unconventional monetary and fiscal policies in interconnected economies: Do policy rules matter?

This paper examines the effects of adopting unconventional policies in a crisis environment characterised by the international transmission of negative financial intermediation and real capital quality shocks. Using a two-country model with financial frictions, we compare adjustments in both countri...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2018-08, Vol.93, p.346-363
Main Authors: Lim, G.C., McNelis, Paul D.
Format: Article
Language:English
Subjects:
Financial frictions
Quantitative easing
Unconventional fiscal policy
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Summary:This paper examines the effects of adopting unconventional policies in a crisis environment characterised by the international transmission of negative financial intermediation and real capital quality shocks. Using a two-country model with financial frictions, we compare adjustments in both countries. We condition one country to adopt a credit easing rule as the monetary regime, regardless of the source of the crisis. We consider results when the other country does nothing, or implements a fiscal (tax-rate) policy rule. Our results show that when both countries experience massive asymmetric shocks, the adoption of optimal policy rules can be used effectively to mitigate negative consequences for both economies. However if the crisis events are due to similar shocks, unconventional monetary policy or fiscal policy can improve conditions in own country, whilst worsening economic conditions in the other country, generating beggar-thy-neighbor growth outcomes.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2018.01.028