Literature tells us that South Africa is under fiscal stress ie. interest rates are higher than the growth rate (r > g). In addition to this, fiscal policy has been poorly co-ordinated. In this light, the fiscal trajectory is not working. This research aims to find the optimal policy in a DSGE model by asking:
- What is the least cost way of achieving a consolidation?
- How does one coordinate between fiscal and monetary policy?
It proceeds to evaluate which are the best policy options and how monetary policy can be included. Impacts on welfare are explored for the various policy options. While the best policy option is to raise the growth rate, there are nuances which ought to be considered.