Monetary-fiscal policy interactions: interdependent policy rule coefficients

Available from: 
October 2013
Paper author(s): 
Manuel Gonzalez-Astudillo (Board of Governors of the Federal Reserve System)
Macroeconomics - Economic growth - Monetary Policy

In this paper, we formulate and solve a new Keynesian model with monetary and fiscal policy rules whose coefficients are time-varying and interdependent. We implement time variation in the policy rules by specifying coefficients that are logistic functions of correlated latent factors and propose a solution method that allows for these characteristics. The paper uses Bayesian methods to estimate the policy rules with time-varying coefficients, endogeneity, and stochastic volatility in a limited-information framework. Results show that monetary policy switches regime more frequently than fiscal policy, and that there is a non-negligible degree of interdependence between policies. Policy experiments reveal that monetary policy can control inflation only in the short run, and that taxes have effects on output and inflation, as the literature on the fiscal theory of the price level suggests, but the effects are attenuated with respect to a pure fiscal regime.


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Research section: 
Lacea 2013 annual meeting
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