Working Paper: NBER ID: w11212
Authors: Troy Davig; Eric M. Leeper
Abstract: 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.
Keywords: No keywords provided
JEL Codes: E1; E5; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lumpsum tax shocks (H29) | output (C67) |
| lumpsum tax shocks (H29) | inflation (E31) |
| estimated policy process (C51) | locally unique and stationary equilibrium (C62) |
| tax shocks (H26) | tax nonneutralities (H29) |
| fiscal theory of the price level (E62) | agents’ expectations (D84) |
| temporary tax cut (H26) | long-run price level (E30) |
| surprise transitory tax cut (H29) | discounted present value of output (H43) |
| fiscal theory mechanism (E62) | output multiplier (E23) |