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Monetary/Fiscal Policy Mix and Agents' Beliefs

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  • Francesco Bianchi

    (Duke University)

Abstract

A micro-founded model that allows for changes in the monetary/fiscal policy mix and in the volatility of structural shocks is fit to US data. Agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion of the macroeconomy. The results show that the '60s and the '70s were characterized by a prolonged period of active scal policy and passive monetary policy. The appointment of Volcker marked a change in the conduct of monetary policy, but it took almost ten years for the fiscal authority to start accomodating this regime change. Counterfactual simulations show that if the active monetary/passive fiscal regime had been in place during the '70s, inflation would have been significantly lower. This result differs from previous ones obtained in the literature and suggests that modeling the fiscal/monetary policy interaction might be very important.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 156.

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Date of creation: 2011
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Handle: RePEc:red:sed011:156

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  1. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
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Cited by:
  1. Francesco Bianchi & Leonardo Melosi, 2013. "Dormant Shocks and Fiscal Virtue," PIER Working Paper Archive 13-032, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Saroj Bhattarai & Jae Won Lee & Woong Yong Park, 2012. "Policy regimes, policy shifts, and U.S. business cycles," Globalization and Monetary Policy Institute Working Paper 109, Federal Reserve Bank of Dallas.
  3. De Graeve, Ferre & Queijo von Heideken, Virginia, 2013. "Identifying Fiscal Inflation," Working Paper Series 273, Sveriges Riksbank (Central Bank of Sweden).
  4. Kliem, Martin & Kriwoluzky, Alexander & Sarferaz, Samad, 2013. "On the low-frequency relationship between public deficits and inflation," Discussion Papers 12/2013, Deutsche Bundesbank, Research Centre.
  5. Saroj Bhattarai & Jae Won Lee & Woong Yong Park, 2012. "Inflation dynamics: the role of public debt and policy regimes," Globalization and Monetary Policy Institute Working Paper 124, Federal Reserve Bank of Dallas.

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