Measuring the Stances of Monetary and Fiscal Policy
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Summary:
We derive measures of the stances of monetary and fiscal policy within the framework of an empirically plausible extension of the basic New Keynesian model, and jointly estimate them for the United States using a closed form multivariate linear filter. Our theoretical analysis reveals that the neutral stance of monetary policy — as measured by the real natural rate of interest — depends on the stance of fiscal policy, which in turn depends on the composition and expected timing of structural changes in the fiscal instruments. Our empirical application finds that accounting for fiscal policy significantly alters the estimated stance of monetary policy, and that the so-called fiscal impulse is a poor proxy for the stance of fiscal policy.
Series:
Working Paper No. 2023/106
Subject:
Financial services Fiscal policy Fiscal stance Monetary policy Monetary stance Output gap Production Real interest rates
Frequency:
regular
English
Publication Date:
May 12, 2023
ISBN/ISSN:
9798400240942/1018-5941
Stock No:
WPIEA2023106
Format:
Paper
Pages:
21
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