CONTROLLING INFLATION WITH TIMID MONETARY–FISCAL REGIME CHANGES

Can monetary policy control inflation when both monetary and fiscal policies change over time? When monetary policy is active, a long-run fiscal principle entails flexibility in fiscal policy that preserves determinacy even when deviating from passive fiscal, substantially for brief periods or timidly for prolonged periods. In order to guarantee a unique equilibrium, monetary and fiscal policies must coordinate not only within but also across regimes, and not simply on being active or passive, but also on their extent. The amplitude of deviations from the active monetary/passive fiscal benchmark determines whether a regime is Ricardian: Timid deviations do not imply wealth effects.     

Monetary and fiscal policy interactions: Evidence from emerging European economies

This paper examines the interactions between fiscal and monetary policy for some former transition, emerging European economies over the 1995Q1–2010Q4 period by using a Markov regime-switching model. We consider the monetary policy rule proposed by Taylor (1993) and the fiscal policy rule suggested by Davig and Leeper (2007) in accounting for monetary and fiscal policy interactions. Empirical results suggest that monetary and fiscal policy rules exhibit switching properties between active and passive regimes and all countries followed both active and passive monetary policies. As for fiscal policy, the Czech Republic, Estonia, Hungary, and Slovenia seem to have alternated between active and passive fiscal regimes while fiscal policies of Poland and the Slovak Republic can be characterized by a single fiscal regime. Although the policy mix and the interactions between monetary and fiscal policy point a diverse picture in our sample countries, the monetary policy seems to be passive in all countries after 2000. This finding is consistent with the constraints imposed by European Union enlargement on monetary policy.     

Further evidence on monetary and fiscal policy coordination

The extent to which fiscal and monetary policies respond to inflation and unemployment and the degree to which policy makers coordinate their policies have important implications for their usefulness as instruments of economic stabilization. Using a framework of minimizing a policy maker's loss function, subject to the state of the economy, this paper tests for the joint determination of monetary and fiscal policies. Our results show that the pre-Reagan/Bush and pre-Volcker/Greenspan eras can be characterized by a noncooperative game between the two policies. For the Reagan/Bush and Volcker/Greenspan regimes, our results are consistent with a cooperative game in which fiscal policy dominates and monetary policy accommodates. Our results also have implications for the possibility of future cooperation by policy makers.Financial support from Southwest Texas State University and DePaul University is gratefully acknowledged.     

Monetary and fiscal policy interactions in a post Keynesian open-economy model

Using a post Keynesian model, this study aims to analyze the stabilizing role of fiscal and monetary policies in an open economy with a managed exchange rate regime. The real exchange rate is modeled as an endogenous variable and inflation explained using the conflicting claims approach. The dynamic properties of macroeconomic equilibrium are evaluated in different regimes of fiscal and monetary policies. The main result of this study suggests that the preferred policy regime is the one in which economic authorities are complementary and fiscal policy plays an explicitly active role. In this regime, the fiscal policy must commit to the target for the rate of capacity utilization and the monetary authority must commit to the inflation target.     

The evolution of the monetary policy regimes in the U.S.

The existing literature on U.S. monetary policy provides no sense of a consensus regarding the existence of a monetary policy regime. This article explores the evolution of U.S. monetary policy regimes via the development of a Markov-switching model predicated on narrative and statistical evidence of a monetary policy regime. We identified five regimes for the period spanning 1956:I?C2005:IV and they roughly corresponded to the Chairman term of the Federal Reserve, except for the Greenspan era. More importantly, we demonstrate that the conflicting results regarding the response to inflation for the pre-Volcker period in the existing literature is not attributable to the different data but due to different samples, and also provided an insight regarding the Great Inflation??namely, that the near non-response to inflation in the early 1960s appears to have constituted the initial seed of the Great Inflation. We also find via analysis of the Markov-switching model for the U.S. real interest rate, that the regime changes in the real interest rate follow the regime changes in monetary policy within 2?years and that the evolution of real interest rate regimes provides a good explanation for the conflicting results regarding the dynamics of real interest rate.     

Neoliberal growth models,monetary union and the Euro crisis. A post-Keynesian perspective

The paper offers an account of the Euro crisis based on post-Keynesian monetary theory and its typology of demand regimes. Neoliberalism has transformed social and financial relations in Europe but it has not given rise to a sustained profit-led growth process. Instead, growth has relied either on financial bubbles and rising household debt (‘debt-driven growth’) or on net exports (‘export-driven growth’). In Europe the financial crisis has been amplified by an economic policy architecture (the Stability and Growth Pact) that aimed at restricting the role of fiscal policy and monetary policy. This neoliberal economic policy regime in conjunction with the separation of monetary and fiscal spheres has turned the financial crisis of 2007 into a sovereign debt crisis in southern Europe.     

Policy coordination and the effectiveness of fiscal stimulus

This paper shows that government spending shocks in the U.S. has become ineffective due to lack of coordination between monetary and fiscal policies. Employing the post-war U.S. data, we report strong stimulus effects of fiscal policy during the pre-Volcker era, which rapidly dissipate as the sample period is shifted toward the post-Volcker era. We explain the causes of this phenomena via a sentiment channel. Employing the Survey of Professional Forecasters data, we show that forecasters tend to systematically overestimate real GDP growth in response to positive innovations in government spending when policies coordinate well with each other. On the other hand, they are likely to underestimate real GDP responses when the monetary authority maintains a hawkish stance that conflicts with the fiscal stimulus. The fiscal stimulus, under such circumstances, generates consumer pessimism, which reduces private spending and ultimately weakens the output effects of fiscal policy. We further report statistical test results that confirm our claims.     

Fiscal policy,macroeconomic performance and industry structure in a small open economy

We analyse how fiscal policy affects both the macroeconomy and the industry structure, using a multi-sector macroeconomic model of the Norwegian economy with an inflation targeting monetary policy. Our simulations show that the magnitude of the government spending and labour tax cut multipliers, whether monetary policy is active or passive, is comparable to what is found in the literature. A novel finding from our simulations is that the industry structure is substantially affected by an expansionary fiscal policy, as value added in the non-traded goods sector increases at the expense of value added in the traded goods sector. Moreover, expansionary fiscal policy reduces the mark-ups in the traded goods sector, while the mark-ups are roughly unchanged in the non-traded goods sector. The contraction of activity in the traded goods sector increases when monetary tightening accompanies the fiscal stimulus. Hence, we find that such a policy mix is likely to produce significant de-industrialization in a small open economy with inflation targeting.     

Monetary–fiscal policy interactions and fiscal stimulus

Increases in government spending trigger substitution effects—both inter- and intra-temporal—and a wealth effect. The ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior. Studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption: higher future taxes create a strong negative wealth effect, while the active monetary response increases the real interest rate. This paper estimates Markov-switching policy rules for the United States and finds that monetary and fiscal policies fluctuate between active and passive behavior. When the estimated joint policy process is imposed on a conventional new Keynesian model, government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized. The paper reports the model's predictions of the macroeconomic impacts of the American Recovery and Reinvestment Act's implied path for government spending under alternative monetary–fiscal policy combinations.     

What is the right balance between US monetary and fiscal policy? Explorations using simulated wavelet-based optimal tracking control

This paper uses wavelet-based optimal control to simulate fiscal and monetary strategies under different levels of policy restrictions. The model applies the maximal overlap discrete wavelet transform to US quarterly GDP data and then uses the decomposed variables to build a large 80-dimensional state-space linear-quadratic tracking model. Using a political targeting design for the frequency range weights, we simulate jointly optimal fiscal and monetary policy where: (1) both fiscal and monetary policy are dually emphasized, (2) fiscal policy is unrestricted while monetary policy is restricted to achieving a steady increase in the market interest rate, (3) only monetary policy is relatively active, while fiscal spending is restricted to achieving a target growth rate, and (4) monetary policy emphasizes short-run stabilization, while fiscal policy utilizes political cycle targeting. The results show that fiscal policy must be more aggressive when the monetary authorities are not accommodating the fiscal expansion and that the dual-emphasis policy leads to a series of interest rate increases that are balanced between a steadily increasing target and a low, fixed rate. This research is the first to construct integrated fiscal and monetary policies in an applied wavelet-based optimal control setting using US data.     

Monetary policy and fiscal limits with no-default

This paper discusses monetary and fiscal policy interactions that stabilize government debt. Two distortions prevail in the model economy: income taxes and liquidity constraints. Possible obstructions to fiscal policy include a ceiling on the equilibrium debt-to-GDP ratio, zero or negative elasticity of tax revenues, and a political intolerance of raising tax rates. At the fiscal limit two mechanisms restore solvency: fiscal inflation, which reduces the real value of nominal debt, and open market operations, which diminish the size of government debt held by the private sector. Three regimes achieve this goal. In all regimes monetary policy is passive. In all regimes a muted tax response to government debt is consistent with equilibrium. The propensity of a fiscal authority to smooth output is found to determine what is an acceptable response (in the form of tax rate changes) to the level of government debt, while monetary policy determines the timing and magnitude of fiscal inflation. Impulse responses show that the inflation and tax hikes needed to offset a permanent shock to transfers are lowest under nominal interest rate pegs. In this regime, most of the reduction in the real value of government debt comes from open market purchases.     

汇率制度与宏观经济政策环境——以加拿大为例

加拿大属于典型的资源性经济,加元的汇率变化多受国际商品和石油价格的影响,超出了国内货币政策的控制范围,是独立浮动或是固定汇率？经过两次试验后,加拿大政府坚定地选择了独立浮动汇率制度,并最终实现了汇率政策与货币政策脱离,以此给予了加拿大银行较大的决策空间,使后者专注于维持较低的通货膨胀环境。同时,加拿大政府努力为汇率制度创造有利的宏观经济政策环境,财政政策和货币政策分工明确、相互支持,为汇率制度和经济增长奠定了可持续的坚实基础。本文以加拿大浮动汇率制度为主线,从财政政策、货币政策、政策搭配角度讨论其宏观经济政策框架,分析加元汇率制度的运行环境。在此基础上,本文探讨加拿大汇率政策及浮动汇率制度的作用与功能。本文第五部分对加拿大银行提出的汇率预测模型作出了较深入的分析。     

Financial distress and fiscal inflation

Is inflation ‘always and everywhere a monetary phenomenon’ or is it fundamentally a fiscal phenomenon? The answer hinges crucially on the underlying monetary–fiscal policy regime. Scant attention has been directed to the role of credit market frictions in discerning the policy regime, despite its growing importance in empirical macroeconomics. We augment a standard monetary model to incorporate fiscal details and credit market imperfections. These ingredients allow for both interpretations of the inflation process in a financially constrained environment. We find that introducing financial frictions to the model and adding financial variables to the dataset generate important identifying restrictions on the observed pattern between inflation and measures of financial and fiscal stress, to the extent that it overturns existing findings about which monetary–fiscal policy regime produced the U.S. data. To confront policy regime uncertainty, we propose the use of dynamic prediction pools and find strong cyclical patterns in the estimated historical regime weights.     

Monetary and Fiscal Policy Interactions in the Euro Area

The problem of monetary and fiscal policy interactions is an important issue for the euro area, since the individual member states of the EMU are responsible for their fiscal policies but monetary policy is pursued by a single monetary authority, the ECB. This paper is concerned with empirical evidence on monetary and fiscal policy interactions in the euro area. We first explore fiscal regimes with a VAR model and find empirical evidence that a non-Ricardian fiscal policy has been pursued in both France and Germany. As an example, we then study how one member state of the EMU, namely, Italy, is responding to the common monetary policy with its fiscal policy and find that Italian fiscal policy seemed to be counteractive to the common monetary policy between 1979 and 1998. In order to study monetary and fiscal policy interactions in a more general way, we explore time-varying interactions by estimating a State-Space model with Markov-switching for some Euro-area countries. There appear to be some regime changes in monetary and fiscal policy interactions in France and Germany, but the interactions between the two policies are not strong. Moreover, the two policies have not been accommodative but counteractive to each other. Finally we explore forward-looking behavior in policy interactions and find that expectations do not seem to have played an important role in the policy designs.     

HETEROGENEITY IN A CURRENCY UNION WITH SOCIAL MARKET OBJECTIVES

In this paper, we explore whether heterogeneity among union members could threaten the stability of the European Monetary Union. The types of heterogeneity we consider are (1) asymmetries in the transmission of monetary and fiscal policies, and (2) differences in national preferences for price stability, output growth, and income redistribution. Our results show that the costs of membership can be significant for countries whose transmissions, structure, or preferences deviate from those underlying the common monetary policy. In part, these costs arise because monetary policy imposed by an independent central bank automatically constrains the use of fiscal policy by national governments.     

The effects of fiscal spending shocks on the performance of simple monetary policy rules

We examine the effects of fiscal shocks on the performance of alternative monetary policy rules in a small dynamic general equilibrium framework. We explicitly consider the interaction between fiscal and monetary policy rules which may be present in the real world. We use a simple specification for the fiscal policy rule and various specifications for the (simple) monetary policy rule. Our analysis suggests that some form of flexible inflation targeting regime would perform well in response to fiscal shocks compared to other forms of policy regimes.     

Monetary and Fiscal Management, Finance, and Growth

This paper addresses three related aspects of monetary and fiscal management in Europe and elsewhere. First, I discuss the implications of economic integration for monetary and fiscal policy, especially the narrow focus on low inflation as the main objective of monetary policy. I argue that because inflation springs from several sources, monetary authorities held responsible by law for maintaining low inflation need to exercise their newfound independence by reserving the right to address all sources of inflation. In this context, I also ponder the question as to whether the increased independence of fiscal policy from short-term political interference would be desirable. Second, I present new empirical evidence of the relationship between inflation, finance, and economic growth across countries, arguing that long-run growth considerations provide an important additional justification for why price stability ought to remain a priority of independent policy makers. Third, I review some further aspects of the relationship between fiscal policy and economic growth, emphasizing the traditional three-pronged role of fiscal management: stabilization, allocation, and distribution, all of which can be conducive to growth. The argument leads to the conclusion that only the stabilization function of fiscal policy and, perhaps, some aspects of the allocation function as well could be usefully delegated in an attempt to immunize them from shortsighted and socially counter-productive political interference, but not the distribution function.     

Can the ECB be Truly Independent? Should It Be?

Most of the literature on the independence of the Central Bank assumes only one policy instrument is available: monetary policy. If we introduce fiscal policy as well, when preferences may differ among policy-makers, the situation is radically different. In this case fiscal policy will substantially weaken the impact of the Central Bank's actions, and may annihilate them altogether. The Stability Pact may then be a liability, instead of an asset, because it renders both policies impotent (even if credible). We examine whether there is any incentive to retain monetary policy independence; and whether accountability can and should be used to ensure fiscal and monetary policies support each other, rather than undermine each other.     

HOW DO FISCAL CONSOLIDATION AND FISCAL STIMULI IMPACT ON THE SYNCHRONIZATION OF BUSINESS CYCLES?

Using quarterly data for a panel of advanced economies, we show that synchronized fiscal consolidation (stimulus) programmes in different countries make their business cycles more closely linked. We also find: (i) some evidence of decoupling when an inflation targeting regime is unilaterally adopted; (ii) an increase in business cycle synchronization when countries fix their exchange rates and become members of a monetary union; (iii) a positive effect of bilateral trade on the synchronization of business cycles. Global factors, such as a rise in global risk aversion and uncertainty and a reversal of nonstandard expansionary monetary policy, can also reduce the degree of co‐movement of business cycles across countries. From a policy perspective, our work shows that an inflation targeting regime coupled with simultaneous fiscal consolidations can lead to more business cycle synchronization.     

MONETARY AND FISCAL POLICY EFFICIENCY AND COORDINATION IN A MULTI‐SECTOR OPEN‐ECONOMY GENERAL EQUILIBRIUM MODEL

The paper analyzes monetary and fiscal stabilization and coordination in a multi‐sector stochastic new open economy macroeconomics (NOEM) model. It first aims to assess the capacity of fiscal and monetary policy to reduce or eliminate the negative welfare effects of an unanticipated productivity shock affecting some or all of the sectors in each country. Second, it evaluates the possible gains from international monetary cooperation as well as the impact of active fiscal policy on the welfare performance of monetary policy. The setup also allows for international asymmetry concerning the uncertainty over the shocks. The results show that monetary and fiscal policies are efficient tools of stabilization and under several conditions they can replicate the flexible‐price equilibrium. However, their welfare performance is not necessarily increased when both monetary and fiscal policies react to shocks at the national level. The existence of bilateral gains from monetary cooperation depends on the degree of asymmetry concerning the uncertainty over the shocks.