Active or Passive? Revisiting the Role of Fiscal Policy During High Inflation

Stephanie Ettmeier and Alexander Kriwoluzky

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

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)
Pages: 96
Date: 2024-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-inv and nep-mon
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Journal Article: Active or passive? Revisiting the role of fiscal policy during high inflation (2024)
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