Measuring the Stances of Monetary and Fiscal Policy

Francis Vitek

No 2023/106, IMF Working Papers from International Monetary Fund

Abstract: We derive measures of the stances of monetary and fiscal policy within the framework of an empirically plausible extension of the basic New Keynesian model, and jointly estimate them for the United States using a closed form multivariate linear filter. Our theoretical analysis reveals that the neutral stance of monetary policy — as measured by the real natural rate of interest — depends on the stance of fiscal policy, which in turn depends on the composition and expected timing of structural changes in the fiscal instruments. Our empirical application finds that accounting for fiscal policy significantly alters the estimated stance of monetary policy, and that the so-called fiscal impulse is a poor proxy for the stance of fiscal policy.

Keywords: stance of monetary policy; stance of fiscal policy; new keynesian model; multivariate linear filter; fiscal policy stance; stances of monetary and fiscal policy; monetary policy stance; filter estimation result; Fiscal stance; Monetary stance; Real interest rates; Output gap; Global (search for similar items in EconPapers)
Pages: 21
Date: 2023-05-12
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mon
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