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Monetary-Fiscal Policy Interactions and Indeterminacy in Postwar US Data

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Author Info

  • Saroj Bhattarai
  • Jae Won Lee
  • Woong Yong Park

Abstract

Using a micro-founded model and a likelihood-based inference method, we show that while a passive monetary and passive fiscal policy regime prevailed in the U.S. before Paul Volcker's chairmanship at the Federal Reserve, an active monetary and passive fiscal policy regime prevailed after his appointment. Since both monetary and fiscal policies were passive pre-Volcker, equilibrium indeterminacy was a feature of the economy. Finally, pre-Volcker, the effects of unanticipated policy shifts were substantially different from those predicted by conventional monetary models: unanticipated increases in interest rates increased inflation and output, while unanticipated increases in lump-sum taxes decreased inflation and output.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.3.173
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 3 (May)
Pages: 173-78

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:173-78

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Cited by:
  1. Saroj Bhattarai & Jae Won Lee & Woong Yong Park, 2013. "Inflation Dynamics: The Role of Public Debt and Policy Regimes," CAMA Working Papers 2013-75, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Woong Yong Park & Jae Won Lee & Saroj Bhattarai, 2012. "Policy Regimes, Policy Shifts, and U.S. Business Cycles," 2012 Meeting Papers 287, Society for Economic Dynamics.

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