Identifying the Stance of Monetary Policy at the Zero Lower Bound: A Markov-switching Estimation Exploiting Monetary-Fiscal Policy Interdependence

Manuel González-Astudillo

No 2014-97, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: In this paper, I propose an econometric technique to estimate a Markov-switching Taylor rule subject to the zero lower bound of interest rates. I show that incorporating a Tobit-like specification allows to obtain consistent estimators. More importantly, I show that linking the switching of the Taylor rule coefficients to the switching of the coefficients of an auxiliary uncensored Markov-switching regression improves the identification of an otherwise unidentifiable prevalent monetary regime. To illustrate the proposed estimation technique, I use U.S. quarterly data spanning 1960:1-2013:4. The chosen auxiliary Markov-switching regression is a fiscal policy rule where federal revenues react to debt and the output gap. Results show that there is evidence of policy co-movements with debt-stabilizing fiscal policy more likely accompanying active monetary policy, and vice versa.

Keywords: Markov-switching coefficients; zero lower bound; monetary-fiscal policy interactions (search for similar items in EconPapers)
JEL-codes: C34 E52 E63 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014-09-19
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Identifying the Stance of Monetary Policy at the Zero Lower Bound: A Markov‐Switching Estimation Exploiting Monetary‐Fiscal Policy Interdependence (2018)
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