Monetary/Fiscal Policy Mix and Agents’ Beliefs
By Francesco Bianchi, Cosmin L. Ilut. 2017
194 citations recorded by the source corpus.
We reinterpret post World War II US economic history using an estimated microfounded model that allows for changes in the monetary/fiscal policy mix. We find that the fiscal authority was the leading authority in the '60s and the '70s. The appointment of Volcker marked a change in the conduct of monetary policy, but inflation dropped only when fiscal policy accommodated this change two years later. In fact, a disinflationary attempt of the monetary authority leads to more inflation if not supported by the fiscal authority. If the monetary authority had always been the leading authority or if agents had been confident about the switch, the Great Inflation would not have occurred and debt would have been higher. This is because the rise in trend inflation and the decline in debt of the '70s were caused by a series of fiscal shocks that are inflationary only when monetary policy accommodates fiscal policy. The reversal in the debt-to-GDP ratio dynamics, the sudden drop in inflation, and the fall in output of the early '80s are explained by the switch in the policy mix itself. If such a switch had not occurred, inflation would have been high for another fifteen years. Regime changes account for the stickiness of inflation expectations during the '60s and the '70s and for the break in the persistence and volatility of inflation.
Subfields: Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/d4fa44fb47ef474096db50b2076d6b3cc4a35024
How researchers see this paper
The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.
In Economics and Econometrics
- Emi Nakamura
- Jón Steinsson
- J. Herreño
- Jonathon Hazell
- Alberto Cavallo
- F. Mat
- Joseph Vavra
- Doireann Fitzgerald
Citations in the corpus
- Escaping the Great Recession (2017, unknown): “In order to log-linearize the model, we follow these steps (see also Schorfheide 2005; Liu, Waggoner, and Zha 2011; and Bianchi and Ilut 2012): 1.”
- The Slope of the Phillips Curve: Evidence from U.S. States (2020, background): “Volcker’s monetary policy constituted a sharp regime shift that was imperfectly credible at the outset but became gradually more credible as time passed (Erceg and Levin 2003; Goodfriend and King 2005; Bianchi and Ilut 2017).”