"Growth and Welfare Consequences of Monetary and Fiscal Policy"

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In the past decade, discussions of the role of government policy have changed rather dramatically. At one time, discussions of policy held out independent and significant roles for both monetary and fiscal policy to influence both business cycles and economic growth. In recent years, the role of government policy in general and monetary policy in particular is seen as much more limited. Much of the research on business cycles has been framed in the context of models where business cycles occur as the result of technology shocks in models that are free of distortions of any kind. Thus, the cause of the cycle is real in origin. A separate but related strand of literature has examined the process of growth in a new light, using new techniques, but abstracting from any concrete role for government policy. The purpose of this project is to analyze the role of government, ie. monetary and fiscal policy, in the context of a real business cycle model. In particular, the effects of policy on the statistical properties of aggregate time series and societal welfare are analyzed. This research is important because it will provide a better understanding of the relative roles of real and monetary factors in affecting economic fluctuations and long term growth.