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On fiscal and monetary policy-induced macroeconomic volatility dynamics

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  • Liu, Xiaochun

Abstract

This paper studies macroeconomic volatility dynamics induced by government spending and monetary policy changes. The policy level and volatility shocks, which are identified through sign restrictions from a time-varying SVAR model, are used to derive explicit functions of macroeconomic volatility impulse responses and decompositions. The SVAR model is specified with time-varying coefficients and stochastic volatility that is included in the mean equation. The empirical results show that the impact of a shock to uncertainty about monetary policy explains about 40% and 25% of output and inflation historical volatility dynamics, respectively, more than other policy shocks since the mid-1980s. The impact of a one-unit government spending level shock on output and inflation uncertainties is equivalent to the impact of about a half unit of a monetary policy volatility shock in the long run, or of about a quarter unit of a monetary policy level shock in the short run.

Suggested Citation

  • Liu, Xiaochun, 2021. "On fiscal and monetary policy-induced macroeconomic volatility dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
    • Handle: RePEc:eee:dyncon:v:127:y:2021:i:c:s0165188921000580
    DOI: 10.1016/j.jedc.2021.104123
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    1. Harrison, Andre & Liu, Xiaochun & Stewart, Shamar L., 2023. "Structural sources of oil market volatility and correlation dynamics," Energy Economics, Elsevier, vol. 121(C).

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    More about this item

    Keywords

    Output and inflation volatility dynamics; Level and volatility shocks; Volatility impulse responses and decompositions; Time-varying SVAR; Government spending and monetary policy shocks;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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