Fiscal policy rules reshape economy, challenging traditional monetary policy approaches.
The article explores how different fiscal policy rules can impact the economy when combined with monetary policy. By considering supply-side effects of fiscal policy, the researchers found that the traditional idea of passive monetary policy and active fiscal policy may not always hold true. They discovered that a combination of fiscal rules based on government debt and budget deficit can lead to cyclical responses to economic shocks. Additionally, they found that optimal monetary policy can help correct inflation bias and increase the persistence of output reactions. Overall, the study highlights the importance of coordinating fiscal and monetary policies to stabilize the economy.