Essays on Monetary/Fiscal Policy Mix

Abstract

This dissertation consists of two essays on monetary/fiscal policy mix. In the first essay, I study an impact of transfer payments on macroeconomic activity of the US economy during the Great Inflation and Great Moderation periods. In a standard structural VAR, there is a positive statistically significant response of output and inflation to a transfer payments shock in the pre-Volcker sample. However, the impact becomes insignificant in the post-Volcker sample. In a quantitative model, a switch from a non-Ricardian regime, where inflation moves to stabilize government debt, to a Ricardian where the Central Bank controls inflation, explains this difference in multipliers. This indicates that the US economy did experience a change in the monetary/fiscal policy mix in the early 80s. In the second essay, I analyze output and welfare multipliers of government spending under different monetary and fiscal policy interaction regimes between the Central Bank and Treasury. In a quantitative macroeconomic model government spending has larger output multiplier in a passive monetary/active fiscal policy regime. However, welfare multiplier of government spending is bigger in the active monetary/passive fiscal policy regime. Therefore, policymakers should distinguish between output and welfare effects of the fiscal program when choosing a policy regime to finance it.