Fiscal policy in contemporary DSGE models
AbstractThe role of fiscal policy in DSGE models has long been ignored. Recent evidence from reduced-form VARs (Sims (2011)), event-studies (Leeper et al. (2012)) and structural models (FernÃ¡ndez-Vilaverde et al. (2012)) shows that information about fiscal variables can add to macroeconomic models. To strongly convey the point that DSGE models should take fiscal policy seriously, we show that even without any information on fiscal variables standard contemporary DSGE models map historical fluctuations to fiscal policy. We estimate a version of the Smets-Wouters model and show that the model interprets changes in long-term interest rates, unrelated to current short rates, as news about fiscal policy through the effect it may have on future inflation. This interpretation is exactly the one Sims (2011) and Leeper and Walker (2012) argue for.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 74.
Date of creation: 2012
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-27 (All new papers)
- NEP-DGE-2012-10-27 (Dynamic General Equilibrium)
- NEP-MAC-2012-10-27 (Macroeconomics)
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