When Tightening Stabilizes: Optimal Fiscal–Monetary Mix under Economic Shocks

Abstract This study investigates the optimal fiscal–monetary policy mix in response to exogenous economic shocks using a heterogeneous-agent New Keynesian (HANK) framework calibrated to the Korean economy. The model incorporates household heterogeneity, incomplete markets, and fiscal instruments including labor income taxes, capital income taxes, and government spending. The analysis considers four types of shocks—markup, total factor productivity, demand, and government debt shocks. The results reveal that fiscal and monetary reactions are not jointly expansionary or contractionary; instead, policy coordination is state-dependent and asymmetric. Countercyclical tax policy combined with an active monetary stance stabilizes output and inflation more effectively than simultaneous fiscal and monetary expansion. Government spending behaves procyclically under several shocks, contrary to traditional Keynesian prescriptions. Policy implications indicate that increasing capital income taxes during adverse shocks, along with timely monetary tightening, improves macroeconomic stability and welfare outcomes. The findings highlight the importance of coordinated but differentiated policy roles rather than uniform expansionary responses during economic turbulence.