We would like to thank the editor Masao Ogaki, Giovanni Callegari, Larry Christiano, Giancarlo Corsetti, Rafael Doménech, Roberto Perotti, Morten Ravn, Julio Rotemberg, two anonymous referees, and seminar participants at the ECB, EEA 2005 Congress (Amsterdam), EUI, 2005 German Workshop in Macroeconomics (Würzburg), German Economic Association 2005 Annual Congress (Bonn), and Goethe University Frankfurt for helpful comments and discussions. Part of this paper was written while Bilbiie was at the Centre for Economic Performance at LSE and Müller was visiting the ECB within the Graduate Research Programme. The hospitality of both institutions is gratefully acknowledged. All remaining errors are our own responsibility. The views expressed in this paper are those of the authors and should not be interpreted as the views of the International Monetary Fund.
What Accounts for the Changes in U.S. Fiscal Policy Transmission?
Article first published online: 20 SEP 2008
© 2008 The Ohio State University
Journal of Money, Credit and Banking
Volume 40, Issue 7, pages 1439–1470, October 2008
How to Cite
BILBIIE, F. O., MEIER, A. and MÜLLER, G. J. (2008), What Accounts for the Changes in U.S. Fiscal Policy Transmission?. Journal of Money, Credit and Banking, 40: 1439–1470. doi: 10.1111/j.1538-4616.2008.00166.x
- Issue published online: 20 SEP 2008
- Article first published online: 20 SEP 2008
- Received March 13, 2007; and accepted in revised form February 13, 2008.
- government spending;
- asset market participation;
- fiscal policy;
- monetary policy;
- vector autoregression;
- minimum distance estimation
Using vector autoregressions on U.S. time series for 1957–79 and 1983–2004, we find government spending shocks to have stronger effects on output, consumption, and wages in the earlier period. We try to account for this observation within a DSGE model featuring price rigidities and limited asset market participation. Specifically, we estimate the structural parameters of the model for both periods by matching impulse responses. Model-based counterfactual experiments suggest that most of the changes in fiscal policy transmission are accounted for by increased asset market participation and the more active monetary policy of the Volcker–Greenspan period.