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Monetary And Fiscal Policy Interactions In The Post-war U.S.

Date Added: Nov 2010
Format: PDF

A New Keynesian model allowing for an Active Monetary and Passive Fiscal policy (AMPF) regime and a Passive Monetary and Active Fiscal policy (PMAF) regime is fit to various U.S. samples from 1955 to 2007. Data in the pre-Volcker periods strongly prefer an AMPF regime, but the estimation is not very informative about whether the inflation coefficient in the interest rate rule exceeds one in pre-Volcker samples. Also, whether a government spending increase yields positive consumption in a PMAF regime depends on price stickiness. An income tax cut can yield a negative labor response if monetary policy aggressively stabilizes output.