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The Identification Of Fiscal And Monetary Policy In A Structural Var

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  • Mardi Dungey

    ()

  • Renee Fry

    ()

Abstract

Jointly identifying the effects of both fiscal and monetary policy shocks in an open economy structural VAR poses identification challenges. The innovations in this paper are to combine the methods of identification via sign restrictions, cointegration and traditional exclusion restrictions within a system which explicitly accounts for both stationary and non-stationary variables. This incorporates the recent identification of permanent and temporary shocks by Pagan and Pesaran (2007). We show how to produce impulse responses and historical decompositions under these circumstances. The application is to the small open economy of New Zealand, where policy makers are actively considering the interaction between monetary and fiscal policies. The results show that over the last 20 years the influence of the fiscal policy stance on output has sometimes been substantial, and generally outweighs the contribution of monetary policy shocks.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2007-29.

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Length: 46 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:een:camaaa:2007-29

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RePEc Biblio mentions

As found on the RePEc Biblio, the curated bibliography for Economics:
  1. > Econometrics > Time Series Models > VAR Models > Sign Restrictions
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Cited by:
  1. Mountford, Andrew & Uhlig, Harald, 2002. "What are the Effects of Fiscal Policy Shocks?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3338, C.E.P.R. Discussion Papers.
  2. Mardi Dungey & M.Tugrul Vehbi, 2011. "A SVECM Model of the UK Economy and The Term Premium," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2011-26, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Mardi Dungey & Renee Fry-McKibbin & Verity Linehan, 2014. "Chinese resource demand and the natural resource supplier," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 46(2), pages 167-178, January.
  4. McKelvie, S. & Hall, Viv B., 2012. "Stylised facts for New Zealand business cycles: A post-1987 perspective," Working Paper Series, Victoria University of Wellington, School of Economics and Finance 2364, Victoria University of Wellington, School of Economics and Finance.
  5. Jesús Crespo Cuaresma & Markus Eller & Aaron Mehrotra, 2011. "The Economic Transmission of Fiscal Policy Shocks from Western to Eastern Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 2, pages 44-68.
  6. Michal Franta & Jan Libich & Petr Stehlík, 2012. "Tracking Monetary-Fiscal Interactions across Time and Space," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2012-40, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Gagnon, Marie-Hélène & Gimet, Céline, 2013. "The impacts of standard monetary and budgetary policies on liquidity and financial markets: International evidence from the credit freeze crisis," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(11), pages 4599-4614.
  8. Hall, Viv B & McDermott, C John, 2011. "An unobserved components common cycle for Australasia? Implications for a common currency," Working Paper Series, Victoria University of Wellington, School of Economics and Finance 1548, Victoria University of Wellington, School of Economics and Finance.
  9. Nicolaas Groenewold, 2012. "Australia and the GFC: Saved by Astute Fiscal Policy?," Economics Discussion / Working Papers, The University of Western Australia, Department of Economics 12-28, The University of Western Australia, Department of Economics.

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