Fiscal policy model offers solutions to economic shocks and debt repayment.
The article presents a model that combines fiscal and monetary policies to explain how governments can manage long-term debt while stabilizing prices. By focusing on sticky prices and interest rate targets, the model shows that fiscal surpluses increase after deficits to repay debt, but do not always respond to unexpected inflation or deflation. This approach helps solve common puzzles and provides reasonable responses to policy shocks. Overall, the model allows for easy integration with other economic models and highlights the importance of active fiscal policy in stabilizing the economy.