Working Paper: CEPR ID: DP12541
Authors: Francesco Molteni; Evi Pappa
Abstract: We analyze the joint effects of monetary and fiscal policy shocks in the U.S. economy using a factor augmented vector autoregressive model with drifting coefficients and stochastic volatility. The time varying structure of the model allows us to assess whether the transmission of monetary policy shocks differ when combined with exogenous expansionary and contractionary fiscal shocks, identified with the narrative approach. Government spending and temporary fiscal transfers weaken the effects of monetary policy shocks; permanent transfers are less effective to counteract the demand effects of monetary policy changes; while tax shocks do not alter the propagation of monetary policy shocks.
Keywords: TVP-FAVAR; Monetary Policy Shocks; Fiscal Policy Shocks; Narrative Evidence
JEL Codes: E52; E62; E63; E65; C32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending shocks (E62) | contractionary effects of monetary policy shocks (E39) |
| temporary fiscal transfers (H87) | contractionary effects of monetary policy shocks (E39) |
| government spending shocks (E62) | fall in consumption following contractionary monetary policy shock (E21) |
| tax shocks (H26) | propagation of monetary policy shocks (E39) |
| permanent transfers (F24) | demand effects of monetary policy changes (E52) |
| labor market dynamics (J29) | mediation of effects of fiscal policy changes (E62) |