Fluctuating Macro Policies and the Fiscal Theory

Troy Davig and Eric Leeper

No 11212, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper estimates regime-switching rules for monetary policy and tax policy over the post-war period in the United States and imposes the estimated policy process on a calibrated dynamic stochastic general equilibrium model with nominal rigidities. Decision rules are locally unique and produce a stationary long-run rational expectations equilibrium in which (lump-sum) tax shocks always affect output and inflation. Tax non-neutralities in the model arise solely through the mechanism articulated by the fiscal theory of the price level. The paper quantifies that mechanism and finds it to be important in U.S. data, reconciling a popular class of monetary models with the evidence that tax shocks have substantial impacts. Because long-run policy behavior determines existence and uniqueness of equilibrium, in a regime-switching environment more accurate qualitative inferences can be gleaned from full-sample information than by conditioning on policy regime.

JEL-codes: E1 E5 E6 (search for similar items in EconPapers)
Date: 2005-03
New Economics Papers: this item is included in nep-mac
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (81)

Published as Fluctuating Macro Policies and the Fiscal Theory , Troy Davig, Eric M. Leeper. in NBER Macroeconomics Annual 2006, Volume 21 , Acemoglu, Rogoff, and Woodford. 2007

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