First, consider the famous Taylor rule. This relates changes in monetary policy rates to changes in inflation and the output gap, anchored around some notion of the equilibrium real interest rate. By and large, the rule assumes fixed coefficients for these feedbacks.
To stabilise these small open economies one has to cut expenditure in the aggregate. 2  BIS central bankers’ speeches  The tools available to reduce aggregate spending are all fiscal, and what is needed, in the end, is a reduction in the fiscal deficit. Most of us, even those who remain wedded to conventional economic analysis, will be in sympathy with this conclusion.