Fiscal stimulus and systematic monetary policy: Postwar evidence for the United States

Sebastian Rüth

Economics Letters, 2018, vol. 173, issue C, 92-96

Abstract: I provide structural VAR evidence that U.S. fiscal stimulus programs induce a systematic loosening of interest rates outside of zero-lower-bound episodes. I characterize this policy easing by the Fed as an indirect reaction to disinflationary dynamics unleashed by fiscal stimulus—a finding I corroborate via Taylor-rule estimations. The supporting monetary policy stance amplifies the impact of the expansion in public spending on GDP by roughly one-third. My evidence aligns with fiscal policy models featuring deep-habits in consumption. The empirical regularity of accommodating policy rates, moreover, questions the perception of stimulus being more effective when policy rates are stuck at zero.

Keywords: Government spending shocks; Systematic monetary policy; Fiscal foresight; Deep-habits; Shock propagation (search for similar items in EconPapers)
JEL-codes: E30 E52 H30 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:173:y:2018:i:c:p:92-96

DOI: 10.1016/j.econlet.2018.09.015

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