Template-Type: ReDIF-Paper 1.0
Title: Active or Passive? Revisiting the Role of Fiscal Policy During High Inflation
Author-Name: Stephanie Ettmeier
Author-Email: ettmeier@uni-bonn.de
Author-Name: Alexander Kriwoluzky
Author-Email: akriwoluzky@diw.de

Classification-JEL: C11, C15, E63, E65
Keywords: Bayesian Analysis, DSGE Models, Monetary-Fiscal Policy Interactions, Monte Carlo Methods

Abstract: We investigate the interplay of the monetary-fiscal policy mix during times of crisis
by drawing insights from the Great Inflation of the 1960s and 1970s. We use a
Sequential Monte Carlo (SMC) algorithm to estimate a DSGE model with three distinct
monetary/fiscal policy regimes. We show that in such a model SMC outperforms
standard sampling algorithms because it is better suited to deal with multimodal posteriors,
an outcome that is highly likely in a DSGE model with monetary-fiscal policy
interactions. From the estimation with SMC a differentiated perspective results: pre-
Volcker macroeconomic dynamics were similarly driven by passive monetary/passive
fiscal policy and fiscal dominance. We apply these insights to study the post-pandemic
inflation period.

Note: 
Length: 96
Creation-Date: 2024-06
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp565
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2024_565