Fiscal and monetary policy, DSGE models, Quantitative easing.
In this paper, I use simple dynamic models to review several important lessons about monetary and fiscal policy. Regarding monetary policy, I will show, among other results, that I) Knowlegde of the money supply is not enough to determine the equilibrium proce path; 2) there is no real separation between fiscal and monetary policy; and 3) quantitative easing is unlikely to have much effect on the economy. The two main lessons I want to review for fiscal policy are I) all evaluations of increases in government consumption must be based on the way in which they are going to be financed and 2) different financing mechanisms will lead to very different outcomes.