We determine and estimate the feedback variables for tax rates which capture the automatic stabilizing behavior of fiscal policy within a DSGE model. To that end we employ the working hypothesis that the fiscal feedback rules share similar characteristics with the Taylor-rule in monetary economics: the empirically observed rule itself is not optimal but its feedback variables are the choice of a welfare-maximizing policymaker. We determine investment for the tax rate on capital income and hours worked for the tax rate on labor income as most important from a normative point of view. What is more, we find strong empirical support for those feedback rules in comparison to common feedback rules in the literature.JEL classification: E62, H30, C51.

Summary We estimate the low‐frequency relationship between fiscal deficits and inflation and pay special attention to its potential time variation by estimating a time‐varying vector autoregression model for US data from 1900 to 2011. We find the strongest relationship neither in times of crisis nor in times of high public deficits, but from the mid 1960s up to 1980. Employing a structural decomposition of the low‐frequency relationship and further narrative evidence, we interpret our results such that the low‐frequency relationship between fiscal deficits and inflation is strongly related to the conduct of monetary policy and its interaction with fiscal policy after World War II.Copyright © 2015 John Wiley & Sons, Ltd.

This paper presents a novel Bayesian method for estimating dynamic stochastic general equilibrium (DSGE) models subject to a constrained posterior distribution for the implied Sharpe ratio. We apply our methodology to a DSGE model with habit formation in consumption and leisure, and show that the constrained estimation produces both reasonable asset‐pricing and business‐cycle implications. Next, we estimate the Smets–Wouters model subject to the same Sharpe ratio constraint. The results move the model closer to reproducing observed risk premia, but at increasing cost to its macroeconomic performance.

Abstract:The recent global financial crisis has increased interest in macroeconomic models that incorporate financial linkages. Here, we compare the simulation properties of five mediumsized general equilibrium models used in Eurosystem central banks which incorporate such linkages. The financial frictions typically considered are the financial accelerator mechanism (convex "spread" costs related to firms' leverage ratios) and collateral constraints (based on asset values). The harmonized shocks we consider illustrate the workings and mechanisms underlying the financial-macro linkages embodied in the models. We also look at historical shock decompositions of real GDP growth across the models since 2005 in order to shed light on the common driving factors underlying the recent financial crisis. In these exercises, the models share qualitatively similar and interpretable features. This gives us confidence that we have some broad understanding of the mechanisms involved.In addition, we also survey the current and developing trends in the literature on financial frictions. Non-technical summaryThe global financial crisis has increased the demand for general equilibrium models that can account for the interaction between financial markets, inflation and the real economy. Yet, many existing policy models largely assume frictionless financial markets (with a few notable exceptions, such as Christiano et al., 2003). This reflects, to some degree, academic and empirical controversy as to the importance of financial channels. Some analyzes stress them as a key amplifier and source of business-cycle fluctuations (e.g. Bernanke et al., 1999) whilst others suggest their impact may be confined to periods of deep financial distress (see Meier and Mueller, 2006). Our paper surveys the strength and nature of financial channels and frictions in a number of prominent central bank models of the European System of Central Banks (hereafter, ESCB), when examined over common simulation and historical exercises. The examined models (five in all) represent a useful cross section since three are estimated on the euro area data, one is estimated from Swedish data and one from Polish data -the latter two being interesting as examples of countries outside the single currency.We present harmonized simulation evidence from the models. Such experiments or model comparison exercises are useful for a number of reasons: First, if -for commonly scaled shocks -the models share qualitatively similar and interpretable features, this gives us confidence that we have some broad understanding of the mechanisms involved. Second, model development is a continuous process and so comparisons of model reactions allows us to build up robustness and common knowledge in the development and assessment of those models. The common shocks that we consider are: a standard monetary shock, an equivalent interest rate spread shock, a loan-to-value ratio shock, and a so-called valuation shock.Overall, we find that the models considered share qualitatively similar and in...

The history of monetary policy disturbances is important and widely used for policy analysis. This time series is essential for the historical decomposition of key macroeconomic variables such as output and prices since it uncovers the historical contribution of monetary policy to the business cycle. The sequence of monetary policy disturbances is moreover important for conducting counterfactual analyses to explore the role of monetary policy. Yet while the importance of the time series of monetary policy shocks is widely recognized, there is strong disagreement about its composition in the empirical literature. In the present paper, we attempt to identify and to quantify this discrepancy, which will be helpful to identify monetary policy shocks better in the future.The existent literature is divided into two prominent strands about identification of monetary policy shocks. One the one hand, structural vector autoregressive models (VAR) are used to shape the endogenous relationship between the policy rate and different economic variables, and monetary policy shocks are identified within the model. On the other hand, monetary policy shocks are identified outside an econometric model as narrative time series, e.g., by Romer and Romer (2004). We attempt to reconcile the monetary policy shock identified with a common structural VAR model and the narrative measure. To achieve this, we incorporate the narrative monetary policy shock account into the VAR model by treating it as a proxy for the structural monetary policy shock. Moreover, we quantify the extent to which the discrepancy still applies and identify two explanations for the disagreement. Alongside the potential measurement error in the narrative time series, as pointed out by the literature, we determine a potential misspecification of the VAR model as a second explanation. Nicht-technische Zusammenfassung University of Bonn AbstractStructural VAR studies disagree with narrative accounts about the history of monetary policy disturbances. We investigate whether employing the narrative monetary shock account as a proxy variable in a VAR model aligns both shock series. We quantify the extent to which the disagreement still applies and identify two explanations for the disagreement. One explanation is measurement error in the narrative time series, another is a misspecification of the VAR model.