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Quarterly Fiscal Policy Experiments with a Multiplier-Accelerator Model

  • David Kendrick

    ()

    (Department of Economics, The University of Texas at Austin)

  • George Shoukry

    ()

    (Department of Economics, The University of Texas at Austin)

In an earlier paper, i.e. Kendrick and Amman (2010) we raised the question of whether adjusting fiscal policy more frequently than its current pace of once a year could be used to improve stabilization. Also, we proposed a method for shedding light on that question by using a small macroeconometric model in a quadratic linear tracking stochastic control framework with an implicit feedback rule to compare a scenario in which fiscal policy was changed quarterly to a scenario in which it was only changed once a year. In this paper we first report on the use of counterfactual experiments in the 2007 thru 2010 period of a major downturn in the economy. We find in one experiment that quarterly changes in policy stabilize output levels in the economy better than annual changes with a slightly larger increase in debt over the counterfactual period. In a second experiment we find that when weight changes are used to get roughly equal stabilization results, the increase in the debt level is substantially less with quarterly than with annual policy changes. In the second part of the paper we repeat the two experiments but do so in a Monte Carlo framework. The results in this more general framework also point the way to a finding that a relatively simple shift from annual to quarterly fiscal policy could provide either better stabilization results with a slightly larger increase in the debt level or similar stabilization results but with a smaller increase in the debt level.

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Paper provided by The University of Texas at Austin, Department of Economics in its series Department of Economics Working Papers with number 130208.

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Length: 27 pages
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:tex:wpaper:130208
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  1. Hans Amman & David Kendrick, 2000. "Mitigation Of The Lucas Critique With Stochastic Control Methods," Computing in Economics and Finance 2000 182, Society for Computational Economics.
  2. Hans M. Amman & David A. Kendrick, 1997. "Linear Quadratic Optimization for Models with Rational Expectations," CARE Working Papers 9708, The University of Texas at Austin, Center for Applied Research in Economics.
  3. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, 07.
  4. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
  5. Deissenberg, Christophe, 1979. "Optimal control of linear econometric models with intermittent controls," Discussion Papers, Series I 127, University of Konstanz, Department of Economics.
  6. Kenneth Garbade, 1975. "Macroeconomics: Discretion in the Choice of Macroeconomic Policies," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 4, number 2, pages 215-238 National Bureau of Economic Research, Inc.
  7. John B. Taylor, 1999. "Introduction to "Monetary Policy Rules"," NBER Chapters, in: Monetary Policy Rules, pages 1-14 National Bureau of Economic Research, Inc.
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