Active or passive? Revisiting the role of fiscal policy during high inflation

Stephanie Ettmeier and Alexander Kriwoluzky

European Economic Review, 2024, vol. 170, issue C

Abstract: We investigate the interplay of the monetary–fiscal policy mix during times of crisis by drawing insights from the Great Inflation of the 1960s and 1970s. We use a Sequential Monte Carlo (SMC) algorithm to estimate a DSGE model with three distinct monetary/fiscal policy regimes. We show that, in such a model, SMC outperforms standard sampling algorithms because it is better suited to deal with multimodal posteriors, an outcome that is highly likely in a DSGE model with monetary–fiscal policy interactions. From the estimation with SMC, a differentiated perspective results: pre-Volcker macroeconomic dynamics were similarly driven by passive monetary/passive fiscal policy and fiscal dominance. We apply these insights to study the post-pandemic inflation period.

Keywords: Bayesian analysis; DSGE models; Monetary-fiscal policy interactions; Monte Carlo methods (search for similar items in EconPapers)
JEL-codes: C11 C15 E63 E65 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:170:y:2024:i:c:s0014292124002034

DOI: 10.1016/j.euroecorev.2024.104874

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