Working Paper: NBER ID: w1716
Authors: Stephen J. Turnovsky
Abstract: This paper analyzes the effects of both anticipated and unanticipated monetary and fiscal disturbances, on the dynamic behavior of a monetary model of a small open economy. It focuses on the adjustment of the short-term and long-term interest rates and the divergence of their transitional paths, particularly in anticipation of these disturbances. The analysis demonstrates how anticipation of a future policy change can generate perverse short-run behavior. The essential reason for the divergence between the short and long rates is that the latter is dominated by long-term expectations, while the former is primarily determined by current influences.
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JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipated future policy changes (E60) | short-term behavior (D91) |
| announcement of a fiscal expansion (E62) | long-term interest rate (E43) |
| anticipated future events (D84) | long-term interest rate (E43) |
| current influences (F69) | short-term interest rate (E43) |
| unanticipated monetary expansion (E49) | short-term nominal interest rate (E43) |
| short-term nominal interest rate (E43) | short-term real rate (E43) |
| short-term real rate (E43) | long-term real rate (E43) |
| arbitrage relationship (F31) | long-term real rate (E43) |