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What Is the Importance of Monetary and Fiscal Shocks in Explaining U.S. Macroeconomic Fluctuations?

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  • BARBARA ROSSI
  • SARAH ZUBAIRY

Abstract

This paper analyzes the importance of monetary and fiscal policy shocks in explaining US macroeconomic fluctuations, and establishes new stylized facts. The novelty of our empirical analysis is that we jointly consider both monetary and fiscal policy, whereas the existing literature only focuses on either one or the other. Our main findings are twofold: fiscal shocks are relatively more important in explaining medium cycle fluctuations whereas monetary policy shocks are relatively more important in explaining business cycle fluctuations; and failing to recognize that both monetary and fiscal policy simultaneously affect macroeconomic variables might incorrectly attribute the fluctuations to the wrong source.
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Suggested Citation

  • Barbara Rossi & Sarah Zubairy, 2011. "What Is the Importance of Monetary and Fiscal Shocks in Explaining U.S. Macroeconomic Fluctuations?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(6), pages 1247-1270, September.
  • Handle: RePEc:mcb:jmoncb:v:43:y:2011:i:6:p:1247-1270 DOI: j.1538-4616.2011.00424.x
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    Cited by:

    1. Jan Babecky & Michal Franta & Jakub Rysanek, 2016. "Effects of Fiscal Policy in the DSGE-VAR Framework: The Case of the Czech Republic," Working Papers 2016/09, Czech National Bank, Research Department.
    2. Salvatore Perdichizzi, 2017. "Estimating Fiscal multipliers in the Eurozone. A Nonlinear Panel Data Approach," DISCE - Working Papers del Dipartimento di Economia e Finanza def058, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
    3. Gerald Carlino & Robert P. Inman, 2016. "Fiscal Stimulus in Economic Unions: What Role for States?," Tax Policy and the Economy, University of Chicago Press, vol. 30(1), pages 1-50.
    4. Caporale, Guglielmo Maria & Costantini, Mauro & Paradiso, Antonio, 2013. "Re-examining the decline in the US saving rate: The impact of mortgage equity withdrawal," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 215-225.
    5. Monacelli, Tommaso & Perotti, Roberto & Trigari, Antonella, 2010. "Unemployment fiscal multipliers," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 531-553, July.
    6. Emily Anderson & Atsushi Inoue & Barbara Rossi, 2016. "Heterogeneous Consumers and Fiscal Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(8), pages 1877-1888, December.
    7. Alfred A. Haug & Tomasz Jedrzejowicz & Anna Sznajderska, 2013. "Combining Monetary and Fiscal Policy in an SVAR for a Small Open Economy," Working Papers 1313, University of Otago, Department of Economics, revised Oct 2013.
    8. Bachmann, Rüdiger & Sims, Eric R., 2012. "Confidence and the transmission of government spending shocks," Journal of Monetary Economics, Elsevier, vol. 59(3), pages 235-249.
    9. Thorsten Drautzburg, 2014. "A Narrative Approach to a Fiscal DSGE Model," 2014 Meeting Papers 791, Society for Economic Dynamics.
    10. Gerald Carlino & Robert P. Inman, 2013. "Macro Fiscal Policy in Economic Unions: States as Agents," NBER Working Papers 19559, National Bureau of Economic Research, Inc.
    11. Valerie A. Ramey, 2011. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.
    12. Bouakez, Hafedh & Chihi, Foued & Normandin, Michel, 2014. "Measuring the effects of fiscal policy," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 123-151.
    13. Murphy, Daniel P., 2013. "How does government spending stimulate consumption?," Globalization and Monetary Policy Institute Working Paper 157, Federal Reserve Bank of Dallas.
    14. Bredemeier, Christian & Juessen, Falko & Winkler, Roland, 2017. "Fiscal Policy and Occupational Employment Dynamics," IZA Discussion Papers 10466, Institute for the Study of Labor (IZA).
    15. Georgiadis, Georgios & Jancokova, Martina, 2017. "Financial Globalisation, Monetary Policy Spillovers and Macro-modelling: Tales from 1001 Shocks," Globalization and Monetary Policy Institute Working Paper 314, Federal Reserve Bank of Dallas.
    16. Lorenzo Bretscher & Alex Hsu & Andrea Tamoni, 2017. "Level and Volatility Shocks to Fiscal Policy: Term Structure Implications," 2017 Meeting Papers 258, Society for Economic Dynamics.
    17. repec:ehl:lserod:56406 is not listed on IDEAS
    18. Christian Bredemeier & Falko Juessen & Andreas Schabert, 2017. "Fiscal Multipliers and Monetary Policy: Reconciling Theory and Evidence," Working Paper Series in Economics 95, University of Cologne, Department of Economics.
    19. Dean Croushore & Simon van Norden, 2016. "Fiscal Forecasts at the FOMC: Evidence from the Greenbooks," CIRANO Working Papers 2016s-17, CIRANO.
    20. Eddie Gerba & Klemens Hauzenberger, 2013. "Estimating US Fiscal and Monetary Interactions in a Time Varying VAR," Studies in Economics 1303, School of Economics, University of Kent.
    21. Molteni, Francesco & Pappa, Evi, 2017. "The Combination of Monetary and Fiscal Policy Shocks: A TVP-FAVAR Approach," CEPR Discussion Papers 12541, C.E.P.R. Discussion Papers.
    22. Daniel Murphy, 2015. "How Can Government Spending Stimulate Consumption?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 551-574, July.
    23. IWAISAKO Tokuo & NAKATA Hayato, 2016. "Impacts of Oil Shocks on Exchange Rates and Macroeconomic Variables: A multi-country analysis," Discussion papers 16039, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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