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Tight and Loose, and Red and Blue: A 'Dance' of Macro Policies in the US

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  • Tatiana Kirsanova
  • Celsa Machado
  • Ana Paula Ribeiro

Abstract

Using optimising policy framework, we build and estimate a small-scale DSGE model of the US, and tell the story of monetary and fiscal policy interactions in 1955-2018. We find that fiscal policy is important to identify shifts in monetary policy preferences, and it is shaped by the political color. We use this model to analyse the episode of zero lower bound on interest rate in 2008-15. We find that the bound constrained monetary policy, explain some observed irregularities in macroeconomic data, and demonstrate that a change to price level targeting could have generated a powerful lift-off from the constraint.

Suggested Citation

  • Tatiana Kirsanova & Celsa Machado & Ana Paula Ribeiro, 2020. "Tight and Loose, and Red and Blue: A 'Dance' of Macro Policies in the US," Working Papers 2020_14, Business School - Economics, University of Glasgow.
    • Handle: RePEc:gla:glaewp:2020_14
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    References listed on IDEAS

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    More about this item

    Keywords

    Optimal Noncooperative Monetary and Fiscal Policy; Zero Lower Bound; Price Level Targeting; Political Color; Bayesian Estimation with Markov Switching;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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

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