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Learning from Errors: The case of monetary and fiscal policy regimes

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  • Tryphonides, Andreas

Abstract

The New Keynesian theory of inflation determination has been under scrutiny due to identification issues, which rather have to do with the mechanism of inflation determination at its core (i.e. Cochrane (2011)). Moreover, similar identification problems arise in the case of fiscal inflation (see for example Leeper and Leith (2016), Leeper and Li (2017) and Leeper and Walker (2012)). This paper makes a positive contribution. We argue that statements about observational equivalence stem from referring to the equilibrium path, while this should not be our primary source of identifying restrictions. Moreover, policy identification (or lack thereof) relies on assumptions on the underlying shock structure, which is unobservable. We instead extract shocks using heterogeneous uncertain restrictions and external datasets, that is, we learn from errors. We are then able to recover deep and policy parameters irrespective of the prevailing equilibrium. We provide time varying evidence on the efficacy of policy in stabilizing the US economy and on the time varying plausibility of Ricardian versus non-Ricardian price determination. Results are work in progress.

Suggested Citation

  • Tryphonides, Andreas, 2018. "Learning from Errors: The case of monetary and fiscal policy regimes," IRTG 1792 Discussion Papers 2018-022, Humboldt University of Berlin, International Research Training Group 1792 "High Dimensional Nonstationary Time Series".
  • Handle: RePEc:zbw:irtgdp:2018022
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    More about this item

    Keywords

    Monetary and fiscal policy; Price Determination; Identification; Learning from errors;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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