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The Combination of Monetary and Fiscal Policy Shocks: A TVP-FAVAR Approach

Francesco Molteni and Evi Pappa ()

No 12541, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze the joint effects of monetary and fiscal policy shocks in the U.S. economy using a factor augmented vector autoregressive model with drifting coefficients and stochastic volatility. The time varying structure of the model allows us to assess whether the transmission of monetary policy shocks differ when combined with exogenous expansionary and contractionary fiscal shocks, identified with the narrative approach. Government spending and temporary fiscal transfers weaken the effects of monetary policy shocks; permanent transfers are less effective to counteract the demand effects of monetary policy changes; while tax shocks do not alter the propagation of monetary policy shocks.

Keywords: fiscal policy shocks; monetary policy shocks; narrative evidence; TVP-FAVAR (search for similar items in EconPapers)
JEL-codes: C32 E52 E62 E63 E65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2017-12
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