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Conference Paper: Policy Regimes, Policy Shifts, and U.S. Business Cycles

TitlePolicy Regimes, Policy Shifts, and U.S. Business Cycles
Authors
KeywordsMonetary and fiscal policy regimes
Monetary and fiscal policy transmission
Indeterminacy
Self-fulfilling beliefs
Output, inflation, and debt dynamics
Bayesian estimation of DSGE models
Issue Date2012
Citation
The 2012 Annual Meeting of the Society for Economic Dynamics (SED 2012), Limassol, Cyprus, 22-24 June 2012. How to Cite?
AbstractUsing 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 that gave rise to self-fulfilling beliefs and 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.
DescriptionSession - Monetary Economics
Persistent Identifierhttp://hdl.handle.net/10722/160851

 

DC FieldValueLanguage
dc.contributor.authorBhattarai, Sen_US
dc.contributor.authorLee, JWen_US
dc.contributor.authorPark, WYen_US
dc.date.accessioned2012-08-16T06:22:13Z-
dc.date.available2012-08-16T06:22:13Z-
dc.date.issued2012en_US
dc.identifier.citationThe 2012 Annual Meeting of the Society for Economic Dynamics (SED 2012), Limassol, Cyprus, 22-24 June 2012.en_US
dc.identifier.urihttp://hdl.handle.net/10722/160851-
dc.descriptionSession - Monetary Economics-
dc.description.abstractUsing 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 that gave rise to self-fulfilling beliefs and 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.-
dc.languageengen_US
dc.relation.ispartof2012 SED Annual Meetingen_US
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectMonetary and fiscal policy regimes-
dc.subjectMonetary and fiscal policy transmission-
dc.subjectIndeterminacy-
dc.subjectSelf-fulfilling beliefs-
dc.subjectOutput, inflation, and debt dynamics-
dc.subjectBayesian estimation of DSGE models-
dc.titlePolicy Regimes, Policy Shifts, and U.S. Business Cyclesen_US
dc.typeConference_Paperen_US
dc.identifier.emailPark, WY: wypark@hku.hken_US
dc.identifier.authorityPark, WY=rp01552en_US
dc.description.naturepostprint-
dc.identifier.hkuros204201en_US

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