On fiscal and monetary policy-induced macroeconomic volatility dynamics

Xiaochun Liu ()

Journal of Economic Dynamics and Control, 2021, vol. 127, issue C

Abstract: This paper studies macroeconomic volatility dynamics induced by government spending and monetary policy changes. The policy level and volatility shocks, which are identified through sign restrictions from a time-varying SVAR model, are used to derive explicit functions of macroeconomic volatility impulse responses and decompositions. The SVAR model is specified with time-varying coefficients and stochastic volatility that is included in the mean equation. The empirical results show that the impact of a shock to uncertainty about monetary policy explains about 40% and 25% of output and inflation historical volatility dynamics, respectively, more than other policy shocks since the mid-1980s. The impact of a one-unit government spending level shock on output and inflation uncertainties is equivalent to the impact of about a half unit of a monetary policy volatility shock in the long run, or of about a quarter unit of a monetary policy level shock in the short run.

Keywords: Output and inflation volatility dynamics; Level and volatility shocks; Volatility impulse responses and decompositions; Time-varying SVAR; Government spending and monetary policy shocks (search for similar items in EconPapers)
JEL-codes: C32 E42 E52 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:127:y:2021:i:c:s0165188921000580

DOI: 10.1016/j.jedc.2021.104123

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