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US Monetary and Fiscal Policies - Conflict or Cooperation?

Xiaoshan Chen, Eric Leeper () and Campbell Leith ()

No 2015-77, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: Most of the literature estimating DSGE models for monetary policy analysis ignores fiscal policy and assumes that monetary policy follows a simple rule. In this paper we allow both fiscal and monetary policy to be described by rules and/or optimal policy which are subject to switches over time. We find that US monetary and fiscal policy have often been in conflict, and that it is relatively rare that we observe the benign policy combination of an conservative monetary policy paired with a debt stabilizing fiscal policy. In a series of counterfactuals, a conservative central bank following a time-consistent fiscal policy leader would come close to mimicking the cooperative Ramsey policy. However, if policy makers cannot credibly commit to such a regime, monetary accommodation of the prevailing fiscal regime may actually be welfare improving.

Keywords: Bayesian Estimation; interest rate rules; fiscal policy rules; optimal monetary policy; optimal fiscal policy; great moderation; commitment; discretion (search for similar items in EconPapers)
Date: 2015-06-29
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Working Paper: U.S. Monetary and Fiscal Policies - Conflict or Cooperation? (2019) Downloads
Working Paper: US Monetary and Fiscal Policies - conflict or cooperation? (2015) Downloads
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