Shocking Policy Coefficients

Luca Gambetti

No 647, Working Papers from Barcelona School of Economics

Abstract: This paper proposes an empirical framework to study the effects of a policy regime change defined as an unpredictable and permanent change in the policy parameters. In particular I show how to make conditional forecast and perform impulse response functions and counterfactual analysis. As an application, the effects of changes in fiscal policy rules in the US are investigated. I find that discretionary fiscal policy has become more countercyclical over the last decades. In absence of such a change, surplus would have been higher, debt lower and output gap more volatile but only until mid 80s. An increase in the degree of counter-cyclicality of fiscal policy has a positive effect on output gap in periods where the level of debt-to-GDP ratio is low and a zero or negative effect when the ratio is high. This explains why a more countercylical stance of the systematic fiscal policy taking place in 2008:II is predicted to be rather ineffective for recovering from the crisis.

Keywords: Policy regime change; Tims-varying coefficients VAR; Parameter identification; Fiscal policy rules; Countercyclical fiscal policy (search for similar items in EconPapers)
JEL-codes: C32 E62 (search for similar items in EconPapers)
Date: 2015-09
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Working Paper: Shocking Policy Coefficients (2012)
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