Working Paper: CEPR ID: DP411
Authors: Peter Westaway; Simon Wren-Lewis
Abstract: This paper offers a critique of the UK government's Medium Term Financial Strategy from a policy optimization perspective. It argues that recent versions of the MTFS can be interpreted as representing the outcome of a policy optimization exercise, but that certain key aspects remain unclear. These include the role of output in the objective function, the interpretation of nominal GDP targets and the role of fiscal policy as an instrument. The importance of these issues is illustrated by carrying out various optimal control exercises on the National Institute's domestic econometric model.
Keywords: policy optimization; monetary policy; fiscal policy
JEL Codes: E61; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fiscal policy (E62) | Macroeconomic management (E60) |
| Nominal GDP (P24) | Inflation (E31) |
| Output (Y10) | Optimal policy settings (E61) |
| MTFS reliance on monetary policy (E63) | Short-term macroeconomic management (E60) |
| Neglecting fiscal policy (E62) | Ineffective economic management (E65) |