Government Spending between Active and Passive Monetary Policy

Collin Philipps () and Sebastian Laumer ()
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Collin Philipps: Department of Economics and Geosciences, US Air Force Academy
Sebastian Laumer: Department of Economics, University of North Carolina Greensboro

No 2022-04, Working Papers from Department of Economics and Geosciences, US Air Force Academy

Abstract: Theory suggests that the government spending multiplier is larger when monetary policy is passive. We find instead that, regardless of the monetary policy regime at the time of a spending shock, the central bank responds actively towards inflation quickly after the shock. This rapid monetary policy response leaves multipliers ultimately unaffected by whether the initial regime was active or passive. Our analysis highlights the necessity of accounting for the monetary policy reaction to spending shocks. Failure to do so ignores the central bank's ability to respond to shocks, potentially leading to a misrepresentation of how multipliers depend on monetary policy.

Keywords: Fiscal Multiplier; Monetary Policy; Nonlinear SVARs (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2022-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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