| This dissertation comprises three essays. The first essay examines the implications of alternative fiscal regimes on output volatility using a series of closed economy models. Two fiscal regimes are considered: a flexible fiscal regime ("Keynes") whereby the government uses fiscal policy in a countercyclical fashion, increasing the budget deficit when output falls and a rigid fiscal regime ("Hoover") whereby the government balances the budget at each point in time by changing its expenditure.;In this essay, I explore which fiscal regime is able to limit output volatility in the presence of shocks.;The second feature highlighted in this essay which raises the probability that a rigid annual balanced-budget approach can be superior in reducing output volatility, involves the interaction between fiscal and monetary policy.;My results for this essay indicate that the degree of forward-lookingness, the nature of the shock hitting the economy and to some extent the degree of price stickiness are important factors in determining the choice of the best fiscal regime.;The second essay extends the analysis developed in the first essay of this thesis to the small open economy case. The same issues are examined but this time using a richer and more complex framework. Several changes are introduced in this essay. However, despite these changes, I find that the results from this chapter are very similar to those obtained in the closed economy framework.;The third essay continues this shift in emphasis from fiscal to monetary policy. The third essay is based on two propositions. First the goal of price stability can be achieved with exchange rate targeting, but with also exchange rate flexibility combined with a monetary policy that targets either the price level or an index of wage rates. Second, this essay is based on the belief that changes in aggregate demand are a very important source of disturbance in the economy. Since these shocks are costly to society, they generate the desire for built-in stability.;The three monetary regimes are compared using several models and I assume that the central bank can target any of these regimes in a modest or aggressive fashion in the face of temporary and on-going shocks in demand. (Abstract shortened by UMI.). |
