Fiscal and Monetary Policy Interaction in a Simple Accelerator Model

In this paper, a simple Keynesian and discrete time multiplier – accelerator model is developed, which results after the inclusion of the money market and a balanced government budget constraint in Samuelson’s (1939) business cycle model. The resulted model is proved to be less stable and the evolution of income around its equilibrium is more likely to exhibit a sinusoidal way of movement. The magnitude of the main tools of fiscal and monetary policy is assumed to be determined solely by the government and the Central Bank respectively, so that income’s constant amplitude around its intertemporal equilibrium value is minimized.