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The Combination of Monetary and Fiscal Policy Shocks: A TVP-FAVAR Approach

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  • Pappa, Evi
  • Molteni, Francesco

Abstract

We analyze the joint effects of monetary and fiscal policy shocks in the U.S. economy using a factor augmented vector autoregressive model with drifting coefficients and stochastic volatility. The time varying structure of the model allows us to assess whether the transmission of monetary policy shocks differ when combined with exogenous expansionary and contractionary fiscal shocks, identified with the narrative approach. Government spending and temporary fiscal transfers weaken the effects of monetary policy shocks; permanent transfers are less effective to counteract the demand effects of monetary policy changes; while tax shocks do not alter the propagation of monetary policy shocks.

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  • Pappa, Evi & Molteni, Francesco, 2017. "The Combination of Monetary and Fiscal Policy Shocks: A TVP-FAVAR Approach," CEPR Discussion Papers 12541, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12541
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    4. Ankargren, Sebastian & Shahnazarian, Hovick, 2019. "The Interaction Between Fiscal and Monetary Policies: Evidence from Sweden," Working Paper Series 365, Sveriges Riksbank (Central Bank of Sweden), revised 01 Apr 2019.

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    More about this item

    Keywords

    Tvp-favar; Monetary policy shocks; Fiscal policy shocks; Narrative evidence;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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