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The Identification Of Fiscal And Monetary Policy In A Structural Var

  • Mardi Dungey

    ()

  • Renee Fry

    ()

Jointly identifying the effects of both fiscal and monetary policy shocks in an open economy structural VAR poses identification challenges. The innovations in this paper are to combine the methods of identification via sign restrictions, cointegration and traditional exclusion restrictions within a system which explicitly accounts for both stationary and non-stationary variables. This incorporates the recent identification of permanent and temporary shocks by Pagan and Pesaran (2007). We show how to produce impulse responses and historical decompositions under these circumstances. The application is to the small open economy of New Zealand, where policy makers are actively considering the interaction between monetary and fiscal policies. The results show that over the last 20 years the influence of the fiscal policy stance on output has sometimes been substantial, and generally outweighs the contribution of monetary policy shocks.

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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2007-29.

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Length: 46 pages
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:een:camaaa:2007-29
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