Dormant Shocks and Fiscal Virtue

Bianchi, Francesco; Melosi, Leonardo

doi:10.1086/674588

Cited by 44 publications

(43 citation statements)

References 42 publications

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“…Finally, the number of extra parameters with respect to a model with perfect information is very low, if not zero, whereas the resulting dynamics can be substantially enriched. For example, Bianchi and Melosi () show that a period of fiscal distress can lead to a run up in inflation that lasts for decades.…”

Section: Discussionmentioning

confidence: 99%

Modeling the Evolution of Expectations and Uncertainty in General Equilibrium

Bianchi

Melosi

2016

Int Economic Review

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We develop methods to solve general equilibrium models in which forward-looking agents are subject to waves of pessimism, optimism, and uncertainty that turn out to critically a¤ect macroeconomic outcomes. Agents in the model are fully rational, conduct Bayesian learning, and they know that they do not know. Therefore, agents take into account that their beliefs will evolve according to what they will observe. This framework accommodates both gradual and abrupt changes in beliefs and allows for an analytical characterization of uncertainty. We use a prototypical Real Business Cycle model to illustrate the methods.JEL Codes: D83, C11, E22.

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Section: Discussionmentioning

confidence: 99%

Modeling the Evolution of Expectations and Uncertainty in General Equilibrium

Bianchi

Melosi

2016

Int Economic Review

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“…Using a Markovswitching DSGE model, show that the rise and fall of US in ‡ation can be explained in light of a change in the monetary/…scal policy mix that occurred a few years after the appointment of Paul Volcker as Federal Reserve Chairman. Bianchi and Melosi (2013) introduce the notion of dormant shocks, showing that a …scal imbalance can lead to an increase in in ‡ation many years after it occurred. This paper di¤ers from the two aforementioned contributions across several dimensions.…”

Section: Related Literaturementioning

confidence: 99%

Escaping the Great Recession

Bianchi

Melosi

2017

American Economic Review

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134

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High uncertainty is an inherent implication of the zero lower bound, while de ‡ation is not because of in ‡ationary pressure due to uncertainty about how debt will be stabilized.We show that policy uncertainty empirically accounts for the absence of de ‡ation in the US economy. Announcing …scal austerity is detrimental in the short run, but it preserves macroeconomic stability. On the other hand, a recession can be mitigated by abandoning …scal discipline, at the cost of increasing macroeconomic instability. The policy trade-o¤ can be resolved by committing to in ‡ating away only the portion of debt accumulated during the recession. JEL Codes: E31, E52, E62, E63, D83

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“…Clarida, Gali, and Gertler, 2000;Lubik and Schorfheide, 2004) or by a central bank which has lost its ability to control inflation (Sims, 2011), while the fiscal authority was playing a dominant role (e.g. Davig and Leeper, 2007;Bianchi and Ilut, 2014;Bianchi and Melosi, 2013). Meltzer (2010) characterizes the period of the 1960s and 1970s as one of the Fed accepting "its role as a junior partner by agreeing to coordinate actions with the administration's fiscal policy."…”

Section: Usamentioning

confidence: 99%

Monetary–fiscal policy interaction and fiscal inflation: A tale of three countries

Kliem

Kriwoluzky

Sarferaz

2016

European Economic Review

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We study the impact of the interaction between fiscal and monetary policy on the lowfrequency relationship between the fiscal stance and inflation using cross-country data from 1965 to 1999. In a first step, we contrast the monetary-fiscal narrative for Germany, the U.S. and Italy with evidence obtained from simple regression models and a time-varying VAR. We find that the low-frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of high fiscal budget deficits and accommodative monetary authorities. In a second step, we use an estimated DSGE model to interpret the low-frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run. The findings from the DSGE model suggest that switches in the monetary-fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low-frequency relationship between the fiscal stance and inflation. Terms of use: Documents in

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Dormant Shocks and Fiscal Virtue

Cited by 44 publications

References 42 publications

Modeling the Evolution of Expectations and Uncertainty in General Equilibrium

Modeling the Evolution of Expectations and Uncertainty in General Equilibrium

Escaping the Great Recession

Monetary–fiscal policy interaction and fiscal inflation: A tale of three countries

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