FISCAL POLICY, INFLATION, AND INTEREST RATES: CORRELATION AND IMPACTS OF AGENTS INTERTEMPORAL CHOICE

Economic policy instruments are conventionally organized into two main areas: fiscal policy and monetary policy. The first, under the responsibility of the Executive Branch, operates through taxation and public spending, conditioned by the budgetary process and legislative approval. The second is largely conducted by central banks often endowed with institutional autonomy and explicit mandates and involves not only liquidity control but, above all, the definition of the interest rate as an instrument for stabilizing inflation and the level of economic activity. This article focuses on fiscal policy, examining its effects on the dynamics of aggregate demand and inflation. It also analyzes the interaction between labor productivity, intertemporal decisions of economic agents, and the determination of the interest rate. From an empirical point of view, it investigates the correlation between interest rates and inflation using Pearsons coefficient. Finally, the work critically discusses the sometimes divergent interpretations of the Keynesian and New Keynesian traditions regarding these relationships.