Monetary-Fiscal Policy Interactions and Indeterminacy in Postwar US Data
Jae Won Lee, and
Woong Yong Park. 2012. "Monetary-Fiscal Policy Interactions and Indeterminacy in Postwar US Data."
American Economic Review,
Using a micro-founded model and a likelihood-based inference method, we show that while a passive monetary and passive fiscal policy regime prevailed in the U.S. before Paul Volcker's chairmanship at the Federal Reserve, an active monetary and passive fiscal policy regime prevailed after his appointment. Since both monetary and fiscal policies were passive pre-Volcker, equilibrium indeterminacy was a feature of the economy. Finally, pre-Volcker, the effects of unanticipated policy shifts were substantially different from those predicted by conventional monetary models: unanticipated increases in interest rates increased inflation and output, while unanticipated increases in lump-sum taxes decreased inflation and output.
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Bhattarai, Saroj (PA State U)
Lee, Jae Won (Rutgers U)
Park, Woong Yong (U Hong Kong)
E13: General Aggregative Models: Neoclassical
E52: Monetary Policy
E62: Fiscal Policy