TY  - JOUR
AU  - Davig,Troy
AU  - Leeper,Eric M.
TI  - Fluctuating Macro Policies and the Fiscal Theory
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11212
PY  - 2005
Y2  - March 2005
UR  - http://www.nber.org/papers/w11212
L1  - http://www.nber.org/papers/w11212.pdf
N1  - Author contact info:
Troy Davig
Barclays Capital
E-Mail: Troy.Davig@barclayscapital.com

Eric M. Leeper
Department of Economics
304 Wylie Hall
Indiana University
Bloomington, IN  47405
Tel: 812/855-9157
Fax: NA
E-Mail: eleeper@indiana.edu
M1  - published as Troy Davig, Eric M. Leeper. "Fluctuating Macro Policies and the Fiscal Theory," in Daron Acemoglu, Kenneth Rogoff and Michael Woodford, editors, "NBER Macroeconomics Annual 2006, Volume 21" MIT Press (2007)

AB  - 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.
ER  -