Fiscal policy in contemporary DSGE models
The role of fiscal policy in DSGE models has long been ignored. Recent evidence from reduced-form VARs (Sims (2011)), event-studies (Leeper et al. (2012)) and structural models (FernÃ¡ndez-Vilaverde et al. (2012)) shows that information about fiscal variables can add to macroeconomic models. To strongly convey the point that DSGE models should take fiscal policy seriously, we show that even without any information on fiscal variables standard contemporary DSGE models map historical fluctuations to fiscal policy. We estimate a version of the Smets-Wouters model and show that the model interprets changes in long-term interest rates, unrelated to current short rates, as news about fiscal policy through the effect it may have on future inflation. This interpretation is exactly the one Sims (2011) and Leeper and Walker (2012) argue for.
|Date of creation:||2012|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Clark, Todd E. & Davig, Troy, 2011.
"Decomposing the declining volatility of long-term inflation expectations,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 35(7), pages 981-999, July.
- Todd E. Clark & Troy A. Davig, 2009. "Decomposing the declining volatility of long-term inflation expectations," Research Working Paper RWP 09-05, Federal Reserve Bank of Kansas City.
- Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2011. "Introducing financial frictions and unemployment into a small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 1999-2041.
- Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2007. "Introducing Financial Frictions and Unemployment into a Small Open Economy Model," Working Paper Series 214, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2011.
- Lawrence J. Christiano & Mathias Trabandt & Karl Walentin, 2010. "Introducing financial frictions and unemployment into a small open economy model," FRB Atlanta CQER Working Paper 2010-04, Federal Reserve Bank of Atlanta.
- Mathias Trabandt & Karl Walentin & Lawrence J. Christiano, 2008. "Introducing Financial Frictions and Unemployment into a Small Open Economy Model," 2008 Meeting Papers 423, Society for Economic Dynamics.
- Badarinza, Cristian & Margaritov, Emil, 2011. "News and policy foresight in a macro-finance model of the US," Working Paper Series 1313, European Central Bank.
- De Graeve, Ferre & Emiris, Marina & Wouters, Raf, 2009. "A structural decomposition of the US yield curve," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 545-559, May.
- Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
- Jeffrey C. Fuhrer, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1183-1209.
- Emi Nakamura & Jón Steinsson, 2008. "Five Facts about Prices: A Reevaluation of Menu Cost Models," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1415-1464.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Sandra Gomes & Caterina Mendicino, 2011. "Housing Market Dynamics: Any News?," Working Papers w201121, Banco de Portugal, Economics and Research Department.
- Gomes, Sandra & Mendicino, Caterina, 2015. "Housing market dynamics: Any news?," Working Paper Series 1775, European Central Bank.
- Sandra Gomes & Caterina Mendicino, 2012. "Housing Market Dynamics: Any News?," Working Papers Department of Economics 2012/23, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
- Hans Dewachter & Marco Lyrio, 2008. "Learning, Macroeconomic Dynamics and the Term Structure of Interest Rates," NBER Chapters,in: Asset Prices and Monetary Policy, pages 191-245 National Bureau of Economic Research, Inc.
- Yasuo Hirose & Takushi Kurozumi, 2011. "Changes in the Federal Reserve Communication Strategy: A Structural Investigation," Bank of Japan Working Paper Series 11-E-2, Bank of Japan. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:red:sed012:74. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.