How is an optimal policy, involving both monetary and fiscal policy modelled? 

This research by Hylton Hollander (Stellenbosch University) uses a loss function to determine the optimal policy. By minimising the instability in variables such as output, debt and the fiscal sustainability gap in fiscal policy, and variables such as output and inflation, in monetary economics, the loss in welfare can be minimised. The model also controls for instability on policy instruments.

To do this, the ways in which fiscal sustainability are measured, and the relationships between government debt and interest rates are explored. A DSGE model and impulse response graphs provide deep insights.