Monetary/Fiscal Policy Mix and Agents' Beliefs
A micro-founded model that allows for changes in the monetary/fiscal policy mix and in the volatility of structural shocks is fit to US data. Agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion of the macroeconomy. The results show that the '60s and the '70s were characterized by a prolonged period of active scal policy and passive monetary policy. The appointment of Volcker marked a change in the conduct of monetary policy, but it took almost ten years for the fiscal authority to start accomodating this regime change. Counterfactual simulations show that if the active monetary/passive fiscal regime had been in place during the '70s, inflation would have been significantly lower. This result differs from previous ones obtained in the literature and suggests that modeling the fiscal/monetary policy interaction might be very important.
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- Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
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