Estimating US Fiscal and Monetary Interactions: From Volcker Chairmanship to the Great Recession
45 Pages Posted: 1 Nov 2013
Date Written: August 30, 2013
Locating the appropriate degree of interaction between fiscal and monetary policy plays an important role in ensuring economic stability. Their joint impact is, however, still unclear. We observe significant differences in the transmission of shocks, in particular between the Great Recession and the Great Moderation, and find a high degree of interactions between monetary and fiscal policy. Further, government revenues largely influence decisions on spending, while spending does not influence tax decisions. Spending stimuli are more effective in expanding output than tax cuts. Under certain conditions regarding private agent expectations, spending increases can result in high and persistent growth.
Keywords: time varying parameter VAR, sign restrictions, fiscal multipliers, Great Recession
JEL Classification: C11, C32, E52, E61, E62, E63
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