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Structural Shocks And The Fiscal Theory Of The Price Level In The Sticky Price Model

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  • KIM, SOYOUNG

Abstract

This paper examines the effects of various structural shocks in the passive monetary-active fiscal regime in which the fiscal theory of the price level is valid, and compares these effects to those suggested by conventional theory (the active monetary-passive fiscal regime), within a framework of the New Keynesian sticky price model. The results suggest that the effects of structural shocks are substantially different in the passive monetary-active fiscal regime. First, a monetary contraction (an increase in the interest-rate) increases the inflation rate persistently, and increases output with lags. Second, a positive government spending shock leads to a consumption rise in the model that predicts a consumption fall based on conventional theory. Third, in response to aggregate-demand and aggregate-supply shocks, a period of inflation above (or below) the steady-state is followed by a period of inflation below (or above) the steady-state. This inflation reversal is also found in the impulse responses of the estimated VAR models during the 1940 s and 1950 s, which suggests that the passive monetary-active fiscal regime seems to be actually in place during that period.I thank the editor, an associate editor, and two anonymous referees for constructive suggestions, Christopher Sims for discussion on earlier drafts, Minjung Chae for research assistance, and Clayton Reck for editorial help. All remaining errors are mine.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 7 (2003)
Issue (Month): 05 (November)
Pages: 759-782

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Handle: RePEc:cup:macdyn:v:7:y:2003:i:05:p:759-782_02

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Cited by:
  1. Kriwoluzky, Alexander, 2012. "Pre-announcement and timing: The effects of a government expenditure shock," European Economic Review, Elsevier, vol. 56(3), pages 373-388.
  2. Fan, Jingwen & Minford, Patrick, 2010. "Can the Fiscal Theory of the price level explain UK inflation in the 1970s?," CEPR Discussion Papers 7630, C.E.P.R. Discussion Papers.
  3. Troy Davig & Eric M. Leeper, 2009. "Monetary-fiscal policy interactions and fiscal stimulus," Research Working Paper RWP 09-12, Federal Reserve Bank of Kansas City.
  4. Shu-Chun S. Yang & Nora Traum, 2010. "Monetary and Fiscal Policy Interactions in the Post-War U.S," IMF Working Papers 10/243, International Monetary Fund.
  5. Saroj Bhattarai & Jae Won Lee & Woong Yong Park, 2012. "Inflation dynamics: the role of public debt and policy regimes," Globalization and Monetary Policy Institute Working Paper 124, Federal Reserve Bank of Dallas.
  6. Eric M. Leeper & Nora Traum & Todd B. Walker, 2011. "Clearing Up the Fiscal Multiplier Morass," NBER Working Papers 17444, National Bureau of Economic Research, Inc.
  7. Soyoung Kim & Nouriel Roubini, 2004. "Twin Deficit or Twin Divergence? Fiscal Policy, Current Account, and Real Exchange Rate in the US," Econometric Society 2004 North American Winter Meetings 271, Econometric Society.
  8. Gonzalez-Astudillo, Manuel, 2013. "Monetary-Fiscal Policy Interactions: Interdependent Policy Rule Coefficients," MPRA Paper 50040, University Library of Munich, Germany.

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