Monetary-fiscal policy interactions: interdependent policy rule coefficients
AbstractIn this paper, we formulate and solve a New Keynesian model with monetary and fiscal policy rules whose coefficients are time-varying and interdependent. We implement time variation in the policy rules by specifying coefficients that are logistic functions of correlated latent factors and propose a solution method that allows for these characteristics. The paper uses Bayesian methods to estimate the policy rules with time-varying coefficients, endogeneity, and stochastic volatility in a limited-information framework. Results show that monetary policy switches regime more frequently than fiscal policy, and that there is a non-negligible degree of interdependence between policies. Policy experiments reveal that contractionary monetary policy lowers inflation in the short run and increases it in the long run. Also, lump-sum taxes affect output and inflation, as the literature on the fiscal theory of the price level suggests, but the effects are attenuated with respect to a pure fiscal regime.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2013-58.
Date of creation: 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-25 (All new papers)
- NEP-CBA-2013-09-25 (Central Banking)
- NEP-LAM-2013-09-25 (Central & South America)
- NEP-LTV-2013-09-25 (Unemployment, Inequality & Poverty)
- NEP-MAC-2013-09-25 (Macroeconomics)
- NEP-MON-2013-09-25 (Monetary Economics)
- NEP-NEU-2013-09-25 (Neuroeconomics)
- NEP-PBE-2013-09-25 (Public Economics)
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