Monetary-Fiscal Policy Interactions: Interdependent Policy Rule Coefficients

Manuel González-Astudillo

MPRA Paper from University Library of Munich, Germany

Abstract: 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 contractionary monetary policy lowers inflation in the short run and increases it in the long run. Also, lump-sum taxes affect 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.

Keywords: Time-varying policy rule coefficients; monetary and fiscal policy interactions; nonlinear state-space models (search for similar items in EconPapers)
JEL-codes: C11 C32 E63 (search for similar items in EconPapers)
Date: 2013-07-16
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Monetary-fiscal policy interactions: interdependent policy rule coefficients (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:50040

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