Rethinking Macroeconomic Policy within a Simple Dynamic Model

We propose a simple macro-dynamic model to rethink standard policy prescriptions. Our model includes exogenous growth, endogenous capital accumulation and debt, demand-driven production with a non-linear IS curve, a dynamic Phillips curve, and fiscal and monetary policy instruments. It has multiple steady states with different stability properties, and it is analytically tractable to a significant extent. We complete the analytical results with simulations. We find alternative growth patterns, endogenous fluctuations, and demand-driven level effects even in the long-run. For certain steady states the model shows saddle-path type instabilities, which lead us to reflect on fiscal and monetary policy standards.