Fiscal policy in a stock-flow consistent model: a comment

Abstract

This comment provides a simple analytical exposition of the model used by Godley and Lavoie (2007a) to argue a case for fiscal stabilization policy. I show that the government-spending stabilization rule they propose ensures budget solvency as long as private-sector saving behavior is stable. If monetary policy is to be actively pursued, a government debt rule is required to avoid instabilities arising from the accumulation of debt interest payments. Godley and Lavoie (2007b) simulate such instabilities but do not propose a solution. I do so and derive optimal policy rules consistent with their model.

Keywords:

• fiscal policy
• fiscal solvency
• monetary policy
• optimal policy rules
• stock-flow consistency