Monetary-fiscal policy interactions: interdependent policy rule coefficients

Manuel González-Astudillo

No 2013-58, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: In this paper, we formulate and solve a New Keynesian model with monetary and fiscal policy rules whose coefficients are time-varying and interdependent. We implement time variation in the policy rules by specifying coefficients that are logistic functions of correlated latent factors and propose a solution method that allows for these characteristics. The paper uses Bayesian methods to estimate the policy rules with time-varying coefficients, endogeneity, and stochastic volatility in a limited-information framework. Results show that monetary policy switches regime more frequently than fiscal policy, and that there is a non-negligible degree of interdependence between policies. Policy experiments reveal that contractionary monetary policy lowers inflation in the short run and increases it in the long run. Also, lump-sum taxes affect output and inflation, as the literature on the fiscal theory of the price level suggests, but the effects are attenuated with respect to a pure fiscal regime.

Date: 2013
New Economics Papers: this item is included in nep-cba, nep-lam, nep-ltv, nep-mac, nep-mon, nep-neu and nep-pbe
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Citations: View citations in EconPapers (15)

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Related works:
Working Paper: Monetary-Fiscal Policy Interactions: Interdependent Policy Rule Coefficients (2013)
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