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Evolving Monetary/Fiscal Policy Mix in the United States

Author

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  • Francesco Bianchi

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 post-WWII 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 fiscal 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 accommodating this regime change.

Suggested Citation

  • Francesco Bianchi, 2012. "Evolving Monetary/Fiscal Policy Mix in the United States," American Economic Review, American Economic Association, vol. 102(3), pages 167-172, May.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:167-72
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.3.167
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    References listed on IDEAS

    as
    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
    2. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 381-399.
    3. Woodford, Michael, 2001. "Fiscal Requirements for Price Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(3), pages 669-728, August.
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    Citations

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    Cited by:

    1. Francesco Bianchi & Cosmin Ilut, 2017. "Monetary/Fiscal Policy Mix and Agent's Beliefs," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 113-139, October.
    2. Manuel Gonzalez-Astudillo, 2013. "Monetary-fiscal policy interactions: interdependent policy rule coefficients," Finance and Economics Discussion Series 2013-58, Board of Governors of the Federal Reserve System (U.S.).
    3. Yang Lu & Ernesto Pasten & Robert King, 2013. "Policy design with private sector skepticism in the textbook New Keynesian model," 2013 Meeting Papers 241, Society for Economic Dynamics.
    4. Keinsley, Andrew, 2016. "Indexing the income tax code, monetary/fiscal interaction, and the great moderation," European Economic Review, Elsevier, vol. 89(C), pages 1-20.
    5. Kostas Mavromatis, 2017. "US monetary regimes and optimal monetary policy in the Euro Area," DNB Working Papers 570, Netherlands Central Bank, Research Department.
    6. repec:eee:macchp:v2-2305 is not listed on IDEAS
    7. Kliem, Martin & Kriwoluzky, Alexander & Sarferaz, Samad, 2016. "Monetary–fiscal policy interaction and fiscal inflation: A tale of three countries," European Economic Review, Elsevier, vol. 88(C), pages 158-184.
    8. Andrew Foerster & Troy Davig, 2014. "Uncertainty and Fiscal Cliffs," 2014 Meeting Papers 717, Society for Economic Dynamics.
    9. Cavalieri, Duccio, 2015. "On stock-flow consistent approaches and the like: the ‘rediscovery’ of model building," MPRA Paper 67050, University Library of Munich, Germany, revised 02 Oct 2015.
    10. By Anna Florio & Alessandro Gobbi, 2015. "Learning the monetary/fiscal interaction under trend inflation," Oxford Economic Papers, Oxford University Press, vol. 67(4), pages 1146-1164.
    11. Adrian, Tobias & Etula, Erkko & Shin, Hyun Song, 2009. "Risk appetite and exchange Rates," Staff Reports 361, Federal Reserve Bank of New York, revised 10 Dec 2015.
    12. Fan, Jingwen & Minford, Patrick & Ou, Zhirong, 2016. "The role of fiscal policy in Britain's Great Inflation," Economic Modelling, Elsevier, vol. 58(C), pages 203-218.
    13. Francesco Zanetti & Philip Liu & Haroon Mumtaz & Konstantinos Theodoridis, 2017. "Changing Macroeconomic Dynamics at the Zero Lower Bound," Economics Series Working Papers 824, University of Oxford, Department of Economics.
    14. Barthélemy, J. & Marx, M., 2012. "Generalizing the Taylor Principle: New Comment," Working papers 403, Banque de France.
    15. repec:eee:eecrev:v:95:y:2017:i:c:p:62-83 is not listed on IDEAS
    16. Castelnuovo, Efrem, 2016. "Modest macroeconomic effects of monetary policy shocks during the great moderation: An alternative interpretation," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 300-314.
    17. repec:eee:dyncon:v:87:y:2018:i:c:p:173-205 is not listed on IDEAS
    18. Xiaoshan Che & Eric M. Leepe & Campbell Leith, 2015. "US Monetary and Fiscal Policies - conflict or cooperation?," Working Papers 2015_14, Business School - Economics, University of Glasgow.
    19. Anna Florio & Alessandro Gobbi, 2014. "Learning the Fiscal Monetary Interaction under Trend Inflation," DEM Working Papers Series 068, University of Pavia, Department of Economics and Management.
    20. Leeper, Eric M. & Li, Bing, 2017. "Surplus–debt regressions," Economics Letters, Elsevier, vol. 151(C), pages 10-15.
    21. Chen, Xiaoshan & Leeper, Eric M. & Leith, Campbell, 2015. "US Monetary and Fiscal Policies - Conflict or Cooperation?," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-77, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    22. Barthélemy, Jean & Marx, Magali, 2017. "Solving endogenous regime switching models," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 1-25.

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