This research investigates-both theoretically and empirically-the implications of ongoing random switches in monetary and fiscal policy regimes of the sort observed in many countries. More specifically, the proposed research o derives qualitative implications in simple models that permit analytical solution; o uses computational methods to obtain quantitative implications in environments in which monetary and tax policies can affect both inflation and real economic activity; o jointly estimates monetary and fiscal impacts in fixed and varying regime models; o obtains maximum likelihood estimates of parameters of a dynamic, stochastic general equilibrium model with regime switching.
The research finds that the key principles guiding the development of models of monetary and fiscal policy can change in critical ways when agents embed the possibility of regime change in their decision rules. Incorporating regime change, therefore, can fundamentally alter existing views about what constitutes good policy. The research develops models with regime-switching monetary and fiscal policies that can be solved analytically and it extends existing linear numerical methods. The project also develops Fortran code that will be publicly available. Finally, the research advances existing work by fitting to data a DSGE model with non-trivial regime switching.
The broader impacts of the research derive primarily from the influence of the findings on the practice of policy. By probing the robustness of existing principles that inform monetary policy behavior, the research contributes directly to improving actual policy performance. By studying them jointly, the research advances empirical work on monetary and fiscal policy, leading to better estimates of the impacts of policy actions on the economy. The research directly addresses questions that concern policy authorities. How important are fiscal policy shocks? What constitutes good monetary policy when fiscal behavior is subject to on-going shifts? Research findings will be disseminated through professional outlets and through the investigators relationships with central banks in North America, Europe, and Japan. Findings will be presented directly to policymakers and published in non-technical policy forums. The research establishes research collaborations with three early-career economists.
