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Italian Economic Journal

, Volume 5, Issue 3, pp 403–431 | Cite as

Policy Lag and Sustained Growth

  • Shunsuke ShinagawaEmail author
  • Eiji Tsuzuki
Research Paper
  • 18 Downloads

Abstract

This study provides a theoretical analysis of economic stability when a fiscal policy lag and sustained economic growth coexist. We develop a New Keynesian model by introducing economic growth based on an exogenous factor and a fiscal policy rule with a delay in policy reaction. We clarify the effect of these factors on economic stability by performing a dynamic analysis of the delay-differential equation system derived from the developed model. Our study has several contributions. First, this study contributes an analysis of the effect of a policy lag on stability. When the economy does not grow, a large policy lag destabilizes the economy. However, in a sustainably growing economy, a large policy lag may eliminate instability and contribute to economic stability. Second, we show that a change in the economic growth rate can affect economic stability under a policy lag. This new finding runs contrary to the usual results from growth models without a policy lag.

Keywords

New Keynesian model Policy lag Delay-differential equation Equilibrium determinacy 

JEL Classification

E32 E52 E62 

Notes

Supplementary material

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Copyright information

© Società Italiana degli Economisti (Italian Economic Association) 2019

Authors and Affiliations

  1. 1.Faculty of EconomicsKanagawa UniversityYokohamaJapan
  2. 2.Faculty of EconomicsNanzan UniversityNagoyaJapan

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