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(Re)Evaluating recent macroeconomic policy in the US

Author

Listed:
  • Kirsanova, Tatiana
  • Leith, Campbell
  • Machado, Celsa
  • Ribeiro, Ana Paula

Abstract

We build and estimate a small-scale DSGE mogement of the University of Porto, Rua Dr. Roberto Frias S/N, 4200-464 Porto, Portugaldel of the US, where policy is described as the strategic interaction between monetary and fiscal policy makers following targeting rules. We use this model to analyse the two episodes where interest rates hit their zero lower bound (ZLB). We find that changing fiscal policy objectives, adopting suitably designed fiscal packages or a temporary price level target could have generated a partial lift-off from the ZLB following the financial crisis. However, under the latter two devices we would have returned to the ZLB. We find that the duration of the ZLB of 2020 was two quarters too long, and the Trump-Biden fiscal stimulus was inflationary, but even taken together, these factors do not wholly explain the subsequent hike in inflation, which instead is predominantly due to the lingering effects of Covid-era shocks.

Suggested Citation

  • Kirsanova, Tatiana & Leith, Campbell & Machado, Celsa & Ribeiro, Ana Paula, 2025. "(Re)Evaluating recent macroeconomic policy in the US," European Economic Review, Elsevier, vol. 178(C).
    • Handle: RePEc:eee:eecrev:v:178:y:2025:i:c:s0014292125001412
    DOI: 10.1016/j.euroecorev.2025.105091
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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