Monetary/Fiscal policy mix and agents' beliefs

Abstract

We thank Fernando Martin for sharing his data on the number of meetings between the US Presidents and the Fed Chairmen. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

The heterogeneous Great Moderation

“…The frequencies to the right of the vertical dashed line are the conventionally defined business cycle frequencies. 28 Interestingly, Bianchi and Ilut (2014) shows that the active/passive monetary/fiscal policies during the post-Volker period is characterized by higher persistence of the interest rate smoothing parameter in the Taylor rule as well as increased persistence of the tax/gdp ratio. 29 In addition, the results of this sections do not aim to provide a complete overview of all the possible explanations of the Great Moderation also because they overlook the role of nominal macroeconomic variables, such as inflation.…”

“…The literature have identified, however, possible sources of a change of the propagation mechanism of the shocks in the post-1980s. For example, Leeper (1991) and Bianchi and Ilut (2014) found that the joint behaviour of active and passive fiscal and monetary policy can account for the observed pattern of inflation and debt-to-gdp dynamics. Since the benchmark DSGE model used in this section does not take into account possible changes in the fiscal policy, it is plausible that changes in the propagation mechanism due to different fiscal policy 25 In all the scenarios I assume that the variances of the shocks, Σ, decline, since otherwise the model is not able to capture the decline of the overall variance of the series.…”

On the stability of Calvo-style price-setting behavior

“…Sims and Zha (2006) develop a class of Markov-switching Bayesian VAR models and find substantial changes only in the stochastic volatility across time. More recently, Schorfheide (2005), Liu et al (2011), Davig and Doh (2013), Bianchi (2013), and Bianchi and Ilut, 2013 embed this Markov-switching framework in DSGE models. These authors find strong evidence supporting the idea that the behavior of the Federal Reserve has changed over time.…”

Firm-specific capital, inflation persistence and the sources of business cycles

“…The depreciation rate δ is fixed at 0.025, the exogenous spending-GDP ratio is set at 18% and the steady-state markup of the labor union (λ w ) at 1.5. These are the same values as in Smets and Wouters (2007 Klenow (2004) and Klenow and Kryvtsov (2008). The remaining fixed parameters are set as in ACEL (2011).…”