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Structural Shocks And The Fiscal Theory Of The Price Level In The Sticky Price Model

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  • KIM, SOYOUNG

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This paper examines the effects of various structural shocks in the passive monetary-active fiscal regime in which the fiscal theory of the price level is valid, and compares these effects to those suggested by conventional theory (the active monetary-passive fiscal regime), within a framework of the New Keynesian sticky price model. The results suggest that the effects of structural shocks are substantially different in the passive monetary-active fiscal regime. First, a monetary contraction (an increase in the interest-rate) increases the inflation rate persistently, and increases output with lags. Second, a positive government spending shock leads to a consumption rise in the model that predicts a consumption fall based on conventional theory. Third, in response to aggregate-demand and aggregate-supply shocks, a period of inflation above (or below) the steady-state is followed by a period of inflation below (or above) the steady-state. This inflation reversal is also found in the impulse responses of the estimated VAR models during the 1940's and 1950's, which suggests that the passive monetary-active fiscal regime seems to be actually in place during that period.I thank the editor, an associate editor, and two anonymous referees for constructive suggestions, Christopher Sims for discussion on earlier drafts, Minjung Chae for research assistance, and Clayton Reck for editorial help. All remaining errors are mine.

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  • Kim, Soyoung, 2003. "Structural Shocks And The Fiscal Theory Of The Price Level In The Sticky Price Model," Macroeconomic Dynamics, Cambridge University Press, vol. 7(5), pages 759-782, November.
  • Handle: RePEc:cup:macdyn:v:7:y:2003:i:05:p:759-782_02
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    Cited by:

    1. Davig, Troy & Leeper, Eric M., 2011. "Monetary-fiscal policy interactions and fiscal stimulus," European Economic Review, Elsevier, vol. 55(2), pages 211-227, February.
    2. Bhattarai, Saroj & Lee, Jae Won & Park, Woong Yong, 2014. "Inflation dynamics: The role of public debt and policy regimes," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 93-108.
    3. Leeper, E.M. & Leith, C., 2016. "Understanding Inflation as a Joint Monetary–Fiscal Phenomenon," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.),Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2305-2415, Elsevier.
    4. Traum, Nora & Yang, Shu-Chun S., 2011. "Monetary and fiscal policy interactions in the post-war U.S," European Economic Review, Elsevier, vol. 55(1), pages 140-164, January.
    5. Fan, Jingwen & Minford, Patrick, 2009. "Can the Fiscal Theory of the price level explain UK inflation in the 1970s?," Cardiff Economics Working Papers E2009/26, Cardiff University, Cardiff Business School, Economics Section, revised Mar 2011.
    6. Canzoneri, Matthew & Cumby, Robert & Diba, Behzad, 2010. "The Interaction Between Monetary and Fiscal Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.),Handbook of Monetary Economics, edition 1, volume 3, chapter 17, pages 935-999, Elsevier.
    7. Dupor, Bill & Li, Rong, 2015. "The expected inflation channel of government spending in the postwar U.S," European Economic Review, Elsevier, vol. 74(C), pages 36-56.
    8. Eric M. Leeper & Campbell Leith, 2016. "Understanding Inflation as a Joint Monetary-Fiscal Phenomenon," NBER Working Papers 21867, National Bureau of Economic Research, Inc.
    9. Eric M. Leeper & Nora Traum & Todd B. Walker, 2017. "Clearing Up the Fiscal Multiplier Morass," American Economic Review, American Economic Association, vol. 107(8), pages 2409-2454, August.
    10. Gonzalez-Astudillo, Manuel, 2013. "Monetary-Fiscal Policy Interactions: Interdependent Policy Rule Coefficients," MPRA Paper 50040, University Library of Munich, Germany.
    11. Tan, Fei, 2017. "An analytical approach to new Keynesian models under the fiscal theory," Economics Letters, Elsevier, vol. 156(C), pages 133-137.
    12. Beck-Friis, Peder & Willems, Tim, 2017. "Dissecting fiscal multipliers under the fiscal theory of the price level," European Economic Review, Elsevier, vol. 95(C), pages 62-83.
    13. 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.
    14. Eric M. Leeper & Nora Traum & Todd B. Walker, 2015. "Clearing Up the Fiscal Multiplier Morass: Prior and Posterior Analysis," NBER Working Papers 21433, National Bureau of Economic Research, Inc.
    15. Kriwoluzky, Alexander, 2012. "Pre-announcement and timing: The effects of a government expenditure shock," European Economic Review, Elsevier, vol. 56(3), pages 373-388.
    16. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
    17. Robert Ambrisko, 2019. "Fiscal Devaluation in a Small Open Economy," Russian Journal of Money and Finance, Bank of Russia, vol. 78(1), pages 67-88, March.
    18. Hur, Joonyoung & Lee, Kang Koo, 2017. "Fiscal financing and the efficacy of fiscal policy in Korea: An empirical assessment with comparison to the U.S. evidence," Economic Modelling, Elsevier, vol. 64(C), pages 473-486.
    19. Ju Hyun Pyun & Dong-Eun Rhee, 2015. "Fiscal Multipliers During The Global Financial Crisis: Fiscal And Monetary Interaction Matters," Contemporary Economic Policy, Western Economic Association International, vol. 33(1), pages 207-220, January.
    20. Kriwoluzky, Alexander & Müller, Gernot & Wolf, Martin, 2013. "Currency Risk in Currency Unions," CEPR Discussion Papers 9635, C.E.P.R. Discussion Papers.

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