Accounting for monetary and fiscal policy effects in a simple dynamic general equilibrium model

Abstract

We construct a simple dynamic general equilibrium model to examine several important macroeconomic issues in the study. The active monetary and passive fiscal (AM/PF) policy may induce the raising of both interest rates and inflation rates. We find that there is a positive relationship between shopping time and inflation because higher inflation causes agents to reduce their money holdings so as to take more time for shopping. In addition, shopping time and output move in opposite ways due to the fact that higher shopping time results in lower working hours, so as to decrease production. Finally, this model fails to capture liquidity effect, but rather identify price puzzle through an expansion of monetary policy shock.