## Achieving a Soft Landing: The Role of Fiscal Policy

_IMF Working Papers, March 1, 2008_

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## Bibliographic details
- Authors: Daniel Leigh
- Published: March 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451869316.001

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### Summary and key findings
- Paper utilizes an open-economy New Keynesian overlapping generations model to assess the extent to which fiscal policy, alongside an inflation-forecast-based monetary policy, could enhance macroeconomic stability in Colombia.
- Model simulations indicate that:
  - A stronger response of the fiscal balance to excess tax revenue would reduce the burden on the central bank of adjusting interest rates.
  - Such a fiscal response would lessen the associated degree of exchange rate volatility.
  - It would contribute to a more stable external current account balance.
  - Fiscal policy can stabilize output and inflation in addition to the monetary policy framework.

### Model, scope, and methodology
- Model type: open-economy New Keynesian overlapping generations model.
- Monetary policy framework considered: inflation-forecast-based monetary policy.
- Analysis assesses sensitivity of fiscal policy effectiveness to:
  - The type of shock.
  - The response of monetary policy.
  - The length of fiscal policy implementation lags.

### Policy implications and recommendations
- Strengthen fiscal balance responses to excess tax revenue to:
  - Reduce central bank interest-rate adjustment needs.
  - Lower exchange rate volatility.
  - Stabilize the external current account.
- Consider interactions between fiscal and monetary policy when designing stabilization strategies.
- Account for implementation lags when evaluating potential stabilizing benefits of fiscal policy.

### Dependence on scenarios and robustness
- Success of fiscal policy in enhancing macroeconomic stability depends on:
  - Type of shock affecting the economy.
  - How monetary policy responds to shocks (inflation-forecast-based rule considered).
  - Length of fiscal policy implementation lags.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/achieving-a-soft-landing-the-role-of-fiscal-policy-21809_