Fiscal Origins of Monetary Paradoxes

Nicolas Caramp and Dejanir Silva
Additional contact information
Nicolas Caramp: UC Davis
Dejanir Silva: UIUC

No 1281, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We revisit the monetary paradoxes of standard monetary models in a liquidity trap and study the channels through which they occur. We focus on two paradoxes: the Forward Guidance Puzzle and the Para- dox of Flexibility. First, we propose a decomposition of consumption into substitution and wealth effects, both of which take into account the general equilibrium effects on output and ination, and we show that the substitution effect cannot account for the puzzles. Instead, mon- etary paradoxes are the result of strong wealth effects which, generi- cally, are solely determined by the expected scal response to the mon- etary shocks. We estimate the scal response to monetary policy shocks with US data and nd responses with the opposite sign to the ones im- plied by the standard equilibrium. Finally, we introduce the estimated scal responses into a medium-size DSGE model. We nd that the impulse-response of consumption and ination do not match the data, suggesting that wealth effects induced by scal policy may be impor- tant even outside of the liquidity trap. We show that models with con- strained agents can produce strong wealth effects if gross private debt is different than zero.

Date: 2019
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2019/paper_1281.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1281

Access Statistics for this paper

More papers in 2019 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().