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Tight and Loose, and Red and Blue: A 'Dance' of Macro Policies in the US

Tatiana Kirsanova, Celsa Machado and Ana Paula Ribeiro

Working Papers from Business School - Economics, University of Glasgow

Abstract: Using optimising policy framework, we build and estimate a small-scale DSGE model of the US, and tell the story of monetary and fiscal policy interactions in 1955-2018. We find that fiscal policy is important to identify shifts in monetary policy preferences, and it is shaped by the political color. We use this model to analyse the episode of zero lower bound on interest rate in 2008-15. We find that the bound constrained monetary policy, explain some observed irregularities in macroeconomic data, and demonstrate that a change to price level targeting could have generated a powerful lift-off from the constraint.

Keywords: Optimal Noncooperative Monetary and Fiscal Policy; Zero Lower Bound; Price Level Targeting; Political Color; Bayesian Estimation with Markov Switching (search for similar items in EconPapers)
JEL-codes: E31 E52 E62 E63 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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