Optimal fiscal policies ensure stable debt levels and zero inflation.
The article explores how governments can manage their finances effectively in the face of economic shocks. By using a model that considers both monetary and fiscal policies, the researchers found that committing to a specific debt level leads to better outcomes than constantly adjusting policies. When governments try to reduce future debt burdens by raising taxes, it can actually fuel inflation and harm the economy. However, if they stick to their initial debt level, the negative effects can be minimized. Overall, the study shows that having a clear plan for managing debt is crucial for economic stability.