Chapter 10 Central Bank Balance Sheets and Real Business Cycles
The government of any country attempts to use monetary and fiscal policy to prevent a decline in aggregate output. However, it is difficult to use countercyclical monetary policy when money is neutral. Countercyclical fiscal policy is possible through an increase in government spending (or a decrease in government tax) when aggregate production is declining. However, the policy might be irrelevant because the general equilibrium allocation of resources is Pareto efficient. The use of countercyclical policy to resolve a fall in output is not optimal.
10.1Linkages between Central Bank Balance Sheets and Real Business Cycles
A firm’s past performance and potential future performance ...