Working Paper: CEPR ID: DP17999
Authors: Lukas Hack; Klodiana Istrefi; Matthias Meier
Abstract: We propose a novel identification design to estimate the effects of systematic monetary policy on the propagation of macroeconomic shocks. The design combines (i) a time-varying measure of systematic monetary policy based on the historical composition of hawks and doves in the FOMC with (ii) an instrument that leverages the FOMC rotation of voting rights. We apply our design to government spending shocks. We find that a dovish FOMC supports the expansionary effects of higher spending by delaying policy rate hikes, leading to large fiscal multipliers. GDP does not expand when the FOMC is hawkish, but inflation expectations are contained.
Keywords: Systematic Monetary Policy; FOMC Rotation; Government Spending
JEL Codes: E32; E52; E62; E63; H56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Systematic monetary policy (E52) | Propagation of macroeconomic shocks (F41) |
| FOMC stance (dovish) (E52) | Fiscal multipliers (E62) |
| FOMC stance (hawkish) (E52) | Fiscal multipliers (E62) |
| Increase in dovish members (E52) | GDP response (E20) |
| Increase in hawkish members (D79) | GDP response (E20) |
| Hawkish FOMC (E52) | Tighten monetary policy in response to fiscal expansions (E62) |
| Dovish FOMC (E52) | Delay tightening in response to fiscal expansions (E62) |
| Systematic monetary policy (E52) | Propagation of government spending shocks (E62) |