Fiscal Policy Rules and Regime (In)Stability: Evidence from the U.S.

IGIER Working Paper No. 282

31 Pages Posted: 14 Feb 2005

See all articles by Carlo A. Favero

Carlo A. Favero

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Tommaso Monacelli

Bocconi University - Department of Economics

Date Written: January 2005

Abstract

We employ Markov-switching regression methods to estimate fiscal policy feedback rules in the U.S. for the period 1960-2002. Our approach allows to capture policy regime changes endogenously. We reach three main conclusions. First, fiscal policy may be characterized, according to Leeper (1991) terminology, as active from the 1960s throughout the 1980s, switching gradually to passive in the early 1990s and switching back to active in early 2001. Second, regime-switching fiscal rules are capable of tracking the time-series behaviour of the U.S. primary deficit better than rules based on a constant parameter specification. Third, regime-switches in monetary and fiscal policy rules do not exhibit any degree of synchronization. Our results are at odds with the view that the post-war U.S. fiscal policy regime may be classified as passive at all times, and seem to pose a challenge for the specification of the correct monetary-fiscal mix within recent optimizing macroeconomic models considered suitable for policy analysis.

Keywords: Active and passive fiscal policy rule, Markov-switching estimation, monetary policy rule

JEL Classification: E62, E50

Suggested Citation

Favero, Carlo A. and Monacelli, Tommaso, Fiscal Policy Rules and Regime (In)Stability: Evidence from the U.S. (January 2005). IGIER Working Paper No. 282. Available at SSRN: https://ssrn.com/abstract=665506 or http://dx.doi.org/10.2139/ssrn.665506

Carlo A. Favero

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tommaso Monacelli (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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