Active, or passive? : revisiting the role of fiscal policy in the great inflation

Stephanie Ettmeier and Alexander Kriwoluzky

We reexamine whether pre-Volcker U.S. ﬁscal policy was active or passive. To do so, we estimate a DSGE model with monetary and ﬁscal policy interactions employing a sequential Monte Carlo algorithm (SMC) for posterior evaluation. Unlike existing studies, we do not have to treat each policy regime as distinct, separately estimated, models. Rather, SMC enables us to estimate the DSGE model over its entire parameter space. A differentiated perspective results: pre-Volcker macroeconomic dynamics were similarly driven by a passive monetary/passive ﬁscal policy regime and ﬁscal dominance. Fiscal policy actions, especially government spending, were critical in the pre-Volcker inﬂation build-up.

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Year of publication:	2020
Authors:	Ettmeier, Stephanie ; Kriwoluzky, Alexander
Publisher:	Berlin : DIW Berlin, German Institute for Economic Research
Subject:	Bayesian Analysis \| DSGE Models \| Monetary-Fiscal Policy Interactions \| Monte Carlo Methods \| Finanzpolitik \| Fiscal policy \| Geldpolitik \| Monetary policy \| Theorie \| Theory \| Monte-Carlo-Simulation \| Monte Carlo simulation \| Bayes-Statistik \| Bayesian inference \| Dynamisches Gleichgewicht \| Dynamic equilibrium \| VAR-Modell \| VAR model \| Inflation