Policy Regimes, Policy Shifts, and U.S. Business Cycles

Saroj Bhattarai, Jae Won Lee and Woong Yong Park

The Review of Economics and Statistics, 2016, vol. 98, issue 5, 968-983

Abstract: Using an estimated DSGE model with monetary and fiscal policy interactions and allowing for equilibrium indeterminacy, we find that a passive monetary and passive fiscal policy regime prevailed in the pre-Volcker period. This gave rise to self-fulfilling beliefs and unconventional transmission mechanisms of policy shifts: unanticipated increases in interest rates increased inflation and output, while unanticipated increases in lump-sum taxes decreased inflation and output. We show that had the monetary policy regime of the post-Volcker era been in place pre-Volcker, inflation volatility would have been lower by 25% and the rise of inflation in the 1970s would not have occurred.

Date: 2016
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Related works:
Working Paper: Policy regimes, policy shifts, and U.S. business cycles (2012)
Working Paper: Policy Regimes, Policy Shifts, and U.S. Business Cycles (2012)
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