Measuring the Stances of Monetary and Fiscal Policy

IMF Working Papers, May 12, 2023

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The paper derives measures of the stances of monetary and fiscal policy within an empirically plausible extension of the basic New Keynesian model.
The stances are jointly estimated for the United States using a closed form multivariate linear filter.
Key empirical finding: accounting for fiscal policy significantly alters the estimated stance of monetary policy.
Key conceptual finding: the so-called fiscal impulse is a poor proxy for the stance of fiscal policy.

The neutral stance of monetary policy — as measured by the real natural rate of interest — depends on the stance of fiscal policy.
The stance of fiscal policy depends on the composition and expected timing of structural changes in fiscal instruments.
Framework: an extension of the basic New Keynesian model (empirically plausible specification).

Joint estimation for the United States using a closed form multivariate linear filter.
Emphasis on filter estimation result and multivariate linear filter methodology.

Accounting for fiscal policy materially changes estimates of the stance of monetary policy.
The commonly used fiscal impulse measure is an inadequate proxy for the stance of fiscal policy.
Implication for analysis: joint consideration of fiscal and monetary policy stances is necessary to correctly assess the neutral rate and policy interactions.

Subject: Financial services; Fiscal policy; Fiscal stance; Monetary policy; Monetary stance; Output gap; Production; Real interest rates
Keywords: filter estimation result, fiscal policy stance, Fiscal stance, Global, monetary policy stance, Monetary stance, multivariate linear filter, new keynesian model, Output gap, Real interest rates, stance of fiscal policy, stance of monetary policy, stances of monetary and fiscal policy