THE IDENTIFICATION OF FISCAL AND MONETARY POLICY IN A STRUCTURAL VAR

CAMA Working Papers from Australian National University, Centre for Applied Macroeconomic Analysis

Abstract: Jointly identifying the effects of both fiscal and monetary policy shocks in an open economy structural VAR poses identification challenges. The innovations in this paper are to combine the methods of identification via sign restrictions, cointegration and traditional exclusion restrictions within a system which explicitly accounts for both stationary and non-stationary variables. This incorporates the recent identification of permanent and temporary shocks by Pagan and Pesaran (2007). We show how to produce impulse responses and historical decompositions under these circumstances. The application is to the small open economy of New Zealand, where policy makers are actively considering the interaction between monetary and fiscal policies. The results show that over the last 20 years the influence of the fiscal policy stance on output has sometimes been substantial, and generally outweighs the contribution of monetary policy shocks.

JEL-codes: E62 E63 C32 C50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2007-12

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