NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Monetary-Fiscal Policy Interactions and Fiscal Stimulus

Troy Davig, Eric M. Leeper

NBER Working Paper No. 15133
Issued in July 2009
NBER Program(s):   EFG

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.

download in pdf format
   (305 K)

email paper

This paper is available as PDF (305 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published: Davig, Troy & Leeper, Eric M., 2011. "Monetary-fiscal policy interactions and fiscal stimulus," European Economic Review, Elsevier, vol. 55(2), pages 211-227, February.

Users who downloaded this paper also downloaded these:
Canzoneri, Cumby, and Diba How Do Monetary and Fiscal Policy Interact in the European Monetary Union?
Leeper, Walker, and Yang w15153 Government Investment and Fiscal Stimulus in the Short and Long Runs
Hall w15496 By How Much Does GDP Rise if the Government Buys More Output?
Alesina and Ardagna w15438 Large Changes in Fiscal Policy: Taxes Versus Spending
Auerbach and Gale w15407 Activist Fiscal Policy to Stabilize Economic Activity
 
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