Mixed Monetary–Fiscal Policies and Macroeconomic Fluctuations: An Analysis Based on the Dynamic Stochastic General Equilibrium Model

Abstract

The existing literature on macroeconomic policy research is mainly concerned with the impact of a single monetary or fi scal policy on China's macroeconomic fl uctuations in a closed economy. However, the effect of a mix of monetary and fi scal policies has been neglected. This paper addresses this issue with an open economy dynamic stochastic general equilibrium model. It applies impulse-response and welfare analyses to explore the stabilization effect of various mixes of monetary and fi scal policies. The results show that the optimal monetary policy and fi scal policy mix varies in different cases. When government spending shocks happen, the aggressive fi scal policy and passive monetary policy would be the best choice. In contrast, for domestic interest rate shocks, foreign interest rate shocks, and foreign consumption shocks, the passive fiscal policy and aggressive monetary policy are more applicable. This article explains China's economic fl uctuations and highlights the importance of mix of monetary and fi scal policies in the face of different shocks.

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