Policy Regimes, Policy Shifts, and U.S. Business Cycles

Posted: 9 Jul 2021

See all articles by Saroj Bhattarai

Saroj Bhattarai

University of Texas at Austin - Department of Economics

Jae Won Lee

affiliation not provided to SSRN

Woong Yong Park

affiliation not provided to SSRN

Date Written: 2012

Abstract

Using an estimated DSGE model that features monetary and fiscal policy interactions and allows for equilibrium indeterminacy, we find that a passive monetary and passive fiscal policy regime prevailed in the pre-Volcker period while an active monetary and passive fiscal policy regime prevailed post-Volcker. Since both monetary and fiscal policies were passive pre-Volcker, there was equilibrium indeterminacy which resulted in substantially different transmission mechanisms of policy as compared to conventional models: unanticipated increases in interest rates increased inflation and output while unanticipated increases in lump-sum taxes decreased inflation and output. Unanticipated shifts in monetary and fiscal policies however, played no substantial role in explaining the variation of inflation and output at any horizon in either of the time periods. Pre-Volcker, in sharp contrast to post- Volcker, we find that a time-varying inflation target does not explain low-frequency movements in inflation. A combination of shocks account for the dynamics of output, inflation, and government debt, with the relative importance of a particular shock quite different in the two time-periods due to changes in the systematic responses of policy. Finally, in a counterfactual exercise, we show that had the monetary policy regime of the post-Volcker era been in place pre-Volcker, inflation volatility would have been lower by 34% and the rise of inflation in the 1970s would not have occurred.

Suggested Citation

Bhattarai, Saroj and Lee, Jae Won and Park, Woong Yong, Policy Regimes, Policy Shifts, and U.S. Business Cycles (2012). Globalization and Monetary Policy Institute Working Paper No. 109, Available at SSRN: https://ssrn.com/abstract=3878625

Saroj Bhattarai (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

Jae Won Lee

affiliation not provided to SSRN

No Address Available

Woong Yong Park

affiliation not provided to SSRN

No Address Available

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
80
PlumX Metrics