Working Paper: NBER ID: w1699
Authors: Stephen J. Turnovsky
Abstract: This paper analyzes the effects of anticipated and unanticipated domestic monetary and fiscal expansions on both the domestic and foreign economies. The analysis is based on symmetric behavior, which is not only not an unreasonable first approximation, but also offers significant analytical advantages. Specifically, it enables the dynamics of the system to be decoupled into (a) averages and (b) differences of relevant variables. Not only does this render the analysis tractable, but it also helps provide economic insight. One striking aspect is that the differences, but not the averages, respond to announcements. The consequences of this for the dynamic adjustments of the two economies to the various disturbances are discussed at length.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Anticipation of future domestic monetary expansion (E49) | Increase in domestic output (E23) |
| Anticipation of future domestic monetary expansion (E49) | Increase in inflation (E31) |
| Anticipation of future domestic monetary expansion (E49) | Recession abroad (F44) |
| Anticipation of future domestic monetary expansion (E49) | Deflation abroad (E31) |
| Unanticipated monetary expansion (E49) | Immediate fall in domestic interest rate (E43) |
| Immediate fall in domestic interest rate (E43) | Rises toward equilibrium (D50) |
| Anticipated fiscal expansion (E62) | Increase in domestic demand (R22) |
| Anticipated fiscal expansion (E62) | Negative reaction in foreign output (F29) |