What Is the Importance of Monetary and Fiscal Shocks in Explaining U.S. Macroeconomic Fluctuations?

This paper analyzes the importance of monetary and fiscal policy shocks in explaining U.S. macroeconomic fluctuations, and establishes new stylized facts. The novelty of our empirical analysis is that we jointly consider both monetary and fiscal policy, whereas the existing literature only focuses on either one or the other. Our main findings are twofold: fiscal shocks are relatively more important in explaining medium cycle fluctuations whereas monetary policy shocks are relatively more important in explaining business cycle fluctuations, and failing to recognize that both monetary and fiscal policy simultaneously affect macroeconomic variables might incorrectly attribute the fluctuations to the wrong source.     

Fiscal Policy in a Currency Union at the Zero Lower Bound

This paper constructs a two‐country core–periphery New Keynesian model of a currency union to address the interaction between the objectives of regionally directed fiscal policy constrained by a single currency and the aggregate use of fiscal policy in face of the zero lower bound (ZLB) on policy interest rates. We identify an optimal path of aggregate and relative fiscal policy responses to a negative region‐specific demand shock. Our results show that (i) in a monetary union, the optimal policy response to an asymmetric reduction in demand concentrated in the periphery always entails a relative shift of fiscal expenditure toward the worse‐affected regions, (ii) though no aggregate fiscal response is required outside the ZLB, and (iii) optimal union‐wide fiscal policy is expansionary at the ZLB. Therefore, optimal policy always entails an expansion in the periphery at the ZLB, but the optimal fiscal response in the core regions can be either expansionary or contractionary depending on the parameters of the model. However, (iv) fiscal expansion in the core is warranted if the periphery cannot implement an expansion due to constraints on public spending.     

Financial Stress Regimes and the Macroeconomy

Some financial stress events lead to macroeconomic downturns, while others appear to be isolated to financial markets. We identify financial stress regimes using a model that explicitly links financial variables to macro‐economic outcomes. The stress regimes are identified using an unbalanced panel of financial variables with an embedded method for variable selection. Our identified stress regimes are associated with corporate credit tightening and with NBER recessions. An exogenous deterioration in our financial conditions index has strong negative effects in economic activity, and negative amplification effects on inflation in the stress regime. These results are obtained with a novel factor‐augmented vector autoregressive model with smooth‐transition regimes (FASTVAR).     

Does Inflation Adjust Faster to Aggregate Technology Shocks than to Monetary Policy Shocks?

This paper studies U.S. inflation adjustment speed to aggregate technology shocks and to monetary policy shocks in a medium size Bayesian vector autoregression model. According to the model estimated on the 1959–2007 sample, inflation adjusts much faster to aggregate technology shocks than to monetary policy shocks. These results are robust to different identification assumptions and measures of aggregate prices. However, by separately estimating the model over the pre‐ and post‐1980 periods, this paper further shows that inflation adjusts much faster to technology shocks than to monetary policy shocks in the post‐1980 period, but not in the pre‐1980 period.     

Inflation and inequality

Cross-country evidence on inflation and income inequality suggests that they are positively related. This article explores the hypothesis that this correlation is the outcome of a distributional conflict underlying the determination of government policies. A political economy model is presented in which equilibrium inflation is positively related to the degree of inequality in income due to the relative vulnerability to inflation of low income households.     

On the robustness of simple and optimal monetary policy rules

This is a discussion of the paper “Simple versus Optimal Rules as Guides to Policy” by Brock, Durlauf, Nason and Rondina (BDNR) presented in November 2006 at Carnegie-Mellon University under the auspices of the Carnegie-Rochester Conference Series on Public Policy. I review the authors’ arguments, present a few suggestions for extension and outline where I think at least one strand of the literature should be heading.     

Mad about Austerity? The Effect of Fiscal Consolidation on Public Opinion

We explore the impact of fiscal austerity on three different dimensions of public opinion in 26 European Union countries (consumer confidence, attitude toward national authorities, and European institutions) on annual data between 1997 and 2017. Our main finding is that the independent effect of a tighter fiscal stance on public opinion is not large and, when present, seems to closely follow the impact of fiscal austerity on economic activity. Our results therefore are inconsistent with the view that fiscal austerity necessarily implies a negative effect on public opinion and a decline in popularity of national and European institutions.     

Volatility in an era of reduced uncertainty: Lessons from Pax Britannica

Although it has been well established that financial volatility is related to news and macroeconomic shocks, less emphasis has been placed on the importance of underlying economic and political stability. In this paper we study the behavior of consol returns since 1729 and identify a greater-than-50% decline in volatility from the end of the Napoleonic Wars in 1815 until the First World War. News events and macroeconomic variables cannot account for this extended period of reduced volatility. Underlying political stability under Pax Britannica seems to be a more likely explanation.     

What Drives Fiscal Decentralisation? Further Assessing the Role of Income*

This paper investigates the determinants of fiscal decentralisation, focusing in particular on the impact of the level of income on the level of fiscal decentralisation. Various measures of fiscal decentralisation, several of them novel in this context, are employed in a cross‐country econometric model to test established and more recent hypotheses. Paying careful attention to variable measurement, model specification and sample coverage, the results suggest that there are significant relationships between fiscal decentralisation and income, as well as a range of other factors. However, these relationships may be more complicated than previously reported. For the entire large sample of countries, and for the OECD subsample, a positive relationship between income and decentralisation is found. This corroborates the results found in earlier studies. However, for the middle‐ and lower‐income nations, higher income is found to be associated with less decentralisation.     

Risk sharing across generations without publicly owned equities

The U.S. Social Security trust fund currently invests in government bonds. Investing some of it instead in equities while continuing to pay Social Security benefits under existing rules would alter—potentially improve—the sharing of financial risks across non-trading generations. This paper shows that the same risk sharing can be achieved without direct government ownership of equities if instead the government places a linear and symmetric tax on risky private capital returns. This equivalence is very robust and holds even if some agents are endogenously borrowing constrained.