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Monetary and Fiscal Policy Interactions in the Post-War U.S

  • Shu-Chun S. Yang
  • Nora Traum

A New Keynesian model allowing for an active monetary and passive fiscal policy (AMPF) regime and a passive monetary and active fiscal policy (PMAF) regime is fit to various U.S. samples from 1955 to 2007. Data in the pre-Volcker periods strongly prefer an AMPF regime, but the estimation is not very informative about whether the inflation coefficient in the interest rate rule exceeds one in pre-Volcker samples. Also, whether a government spending increase yields positive consumption in a PMAF regime depends on price stickiness. An income tax cut can yield a negative labor response if monetary policy aggressively stabilizes output.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/243.

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Length: 46
Date of creation: 01 Nov 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/243
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