Monetary-Fiscal Policy Interactions and Indeterminacy in Postwar US Data
American Economic Review
vol. 102,
no. 3, May 2012
(pp. 173-78)
Abstract
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.Citation
Bhattarai, Saroj, Jae Won Lee, and Woong Yong Park. 2012. "Monetary-Fiscal Policy Interactions and Indeterminacy in Postwar US Data." American Economic Review, 102 (3): 173-78. DOI: 10.1257/aer.102.3.173Additional Materials
JEL Classification
- E13 General Aggregative Models: Neoclassical
- E52 Monetary Policy
- E62 Fiscal Policy