NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Fluctuating Macro Policies and the Fiscal Theory

Troy Davig, Eric M. Leeper

NBER Working Paper No. 11212
Issued in March 2005
NBER Program(s):   EFG

This paper estimates regime-switching rules for monetary policy and tax policy over the post-war period in the United States and imposes the estimated policy process on a calibrated dynamic stochastic general equilibrium model with nominal rigidities. Decision rules are locally unique and produce a stationary long-run rational expectations equilibrium in which (lump-sum) tax shocks always affect output and inflation. Tax non-neutralities in the model arise solely through the mechanism articulated by the fiscal theory of the price level. The paper quantifies that mechanism and finds it to be important in U.S. data, reconciling a popular class of monetary models with the evidence that tax shocks have substantial impacts. Because long-run policy behavior determines existence and uniqueness of equilibrium, in a regime-switching environment more accurate qualitative inferences can be gleaned from full-sample information than by conditioning on policy regime.

download in pdf format
   (510 K)

email paper

This paper is available as PDF (510 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11212

Published: Fluctuating Macro Policies and the Fiscal Theory, Troy Davig, Eric M. Leeper. in NBER Macroeconomics Annual 2006, Volume 21, Acemoglu, Rogoff, and Woodford. 2007

Users who downloaded this paper also downloaded these:
Davig, Leeper, and Chung w10362 Monetary and Fiscal Policy Switching
Davig and Leeper w15133 Monetary-Fiscal Policy Interactions and Fiscal Stimulus
Davig and Leeper Fluctuating Macro Policies and the Fiscal Theory
Davig and Leeper w12405 Endogenous Monetary Policy Regime Change
Davig and Leeper w11874 Generalizing the Taylor Principle
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us