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Empirical Evidence on the Behavior and Stabilizing Role of Fiscal and Monetary Policies in the US

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  • Manuel Coutinho Pereira

Abstract

In this paper, standard SVAR tools and counterfactual simulation techniques are applied to study the behavior and countercyclical role of monetary and fiscal policies in the US. In order to set up the model properly, different issues raised by joint identification of monetary and fiscal policy shocks are addressed, in particular, the contemporaneous response of taxes to the federal funds rate. I conclude that the federal funds rate and taxes net of transfers have moved mostly for endogenous reasons and, in the latter case, this reflects automatic rather than discretionary policy. In contrast, government expenditure has been basically driven by exogenous forces. Further, I reach evidence that (automatic) fiscal policy has been the most important stabilizing force in the course of postwar recessions, surpassing the role of monetary policy, while both policies have contributed similarly to narrowing the output gap at early stages of the recovery.

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File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/WP200813.pdf
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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200813.

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Date of creation: 2008
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Handle: RePEc:ptu:wpaper:w200813

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  1. Paul van den Noord, 2000. "The Size and Role of Automatic Fiscal Stabilizers in the 1990s and Beyond," OECD Economics Department Working Papers 230, OECD Publishing.
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Cited by:
  1. Manuel Coutinho Pereira & Lara Wemans, 2013. "Output effects of fiscal policy in Portugal: a structural VAR approach," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

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