Empirical Evidence on the Behavior and Stabilizing Role of Fiscal and Monetary Policies in the US

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: In this paper, standard SVAR tools and counterfactual simulation techniques are applied to study the behavior and countercyclical role of monetary and fiscal policies in the US. In order to set up the model properly, different issues raised by joint identification of monetary and fiscal policy shocks are addressed, in particular, the contemporaneous response of taxes to the federal funds rate. I conclude that the federal funds rate and taxes net of transfers have moved mostly for endogenous reasons and, in the latter case, this reflects automatic rather than discretionary policy. In contrast, government expenditure has been basically driven by exogenous forces. Further, I reach evidence that (automatic) fiscal policy has been the most important stabilizing force in the course of postwar recessions, surpassing the role of monetary policy, while both policies have contributed similarly to narrowing the output gap at early stages of the recovery.

JEL-codes: E63 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w200813

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