Fiscal Stabilization Policy


This theme forms part of an ESRC-financed project “Monetary and Fiscal Policy Rules with Labour Market and Financial Frictions” running from, September 2010- September 2012.  It in turn builds on a previous ESRC-financed "Robust Monetary Policy Rules for the Open Economy", September 2005 – September 2007 which was graded ‘’Outstanding”.


The broad modelling strategy is to develop and estimate a new DSGE model that is suitable for the study of fiscal alongside monetary policy. The fiscal dimension, the centrepiece of the project, requires new transmission mechanisms that were absent in the earlier generation DSGE models, such as “deep habit’’, and proper attention to the fiscal consequences of unemployment.

We are proceeding with a core medium size model without this dimension, a fairly standard Christiano-Smets-Wouters type of New Keynesian DSGE closed-economy model with capital and staggered prices and wages. Then we are analysing separately the consequences of these new features for model fit and policy. The model is being estimated using US data by Bayesian- Maximum-Likelihood methods. Throughout, particular attention will be paid to robustness issues and to the information assumptions of agents, the policymaker and the econometrician.

A series of empirical studies complementary to the DSGE modelling investigates the size of the fiscal stimuli using a SVAR approach.


Cristiano Cantore & Paul Levine & Giovanni Melina & Bo Yang, 2012 "A Fiscal Stimulus with Deep Habits and Optimal Monetary Policy," Economics Letters, Volume 117, Issue 1, Pages 348-353.

Cristiano Cantore & Paul Levine & Giovanni Melina, 2014. "A Fiscal Stimulus and Jobless Recovery,” Scandinavian Journal of Economics vol. 116(3), pages 669-701.

Yunus Aksoy & Giovanni Melina, 2011. "An Empirical Investigation of US Fiscal Expenditures and Macroeconomic Outcomes," Birkbeck Working Papers in Economics and Finance 1105, Birkbeck, Department of Economics, Mathematics & Statistics.  Published as:     

Yunus Aksoy & Giovanni Melina (2012), An Empirical Investigation of US Fiscal Expenditures and Macroeconomic Outcomes, Economics Letters, 114(1), 64-68.

Matteo Fragetta & Giovanni Melina, 2011. "The Effects Of Fiscal Policy Shocks In Svar Models: A Graphical Modelling Approach," Scottish Journal of Political Economy, Scottish Economic Society, vol. 58(4), pages 537-566, 09.

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