Fiscal and macroprudential policy coordination for stabilization purposes

Abstract

The COVID-19 pandemic has highlighted the need of maintaining financial and economic stabilization to mitigate the negative effects of the health crisis. In the context of a currency area, national governments count on national fiscal and macroprudential instruments to stabilize their own economy. Through a DSGE model for a monetary union I assess the welfare implications of different macroprudential-fiscal policy combinations, that are set with stabilization purposes. The findings confirm that for a supply and a demand shock, as the ones responsible for the economic crisis of 2020, the stabilizing policy mix might deteriorate welfare. By contrast, after a financial shock, similar to that of the Great Recession, the stabilizing policy combination strategies always achieve welfare gains.