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Shocking Policy Coefficients

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  • Luca Gambetti

Abstract

This paper proposes an empirical framework to study the effects of a policy regime change defined as an unpredictable and permanent change in the policy parameters. In particular I show how to make conditional forecast and perform impulse response functions and counterfactual analysis. As an application, the effects of changes in fiscal policy rules in the US are investigated. I find that discretionary fiscal policy has become more countercyclical over the last decades. In absence of such a change, surplus would have been higher, debt lower and output gap more volatile but only until mid 80s. An increase in the degree of counter-cyclicality of fiscal policy has a positive effect on output gap in periods where the level of debt-to-GDP ratio is low and a zero or negative effect when the ratio is high. This explains why a more countercylical stance of the systematic fiscal policy taking place in 2008:II is predicted to be rather ineffective for recovering from the crisis.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 647.

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Date of creation: May 2012
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Handle: RePEc:bge:wpaper:647

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Keywords: Policy regime change; Tims-varying coefficients VAR; Parameter identification; Fiscal policy rules; Countercyclical fiscal policy;

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  1. Eric M. Leeper & Tao Zha, 2002. "Modest Policy Interventions," NBER Working Papers 9192, National Bureau of Economic Research, Inc.
  2. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  4. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  5. Troy Davig & Eric M. Leeper, 2007. "Fluctuating Macro Policies and the Fiscal Theory," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 247-316 National Bureau of Economic Research, Inc.
  6. Hess Chung & Troy Davig & Eric M. Leeper, 2007. "Monetary and Fiscal Policy Switching," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(4), pages 809-842, 06.
  7. David B. Gordon & Eric M. Leeper, 2005. "Are Countercyclical Fiscal Policies Counterproductive?," NBER Working Papers 11869, National Bureau of Economic Research, Inc.
  8. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
  9. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, August.
  10. Roberto Perotti, 1999. "Fiscal Policy In Good Times And Bad," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1399-1436, November.
  11. John B. Taylor, 2000. "Reassessing Discretionary Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 21-36, Summer.
  12. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
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