## Monetary and Fiscal Policy Interactions in the Post-war U.S

_IMF Working Papers, November 1, 2010_

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**Canonical URL:** [Monetary and Fiscal Policy Interactions in the Post-war U.S](https://www.imf.org/en/publications/wp/issues/2016/12/31/monetary-and-fiscal-policy-interactions-in-the-post-war-u-24322)

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## Bibliographic details
- Authors: Susan S. Yang, Nora Traum
- Published: November 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455209439.001

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### Summary
- A New Keynesian model that permits two regimes — active monetary and passive fiscal policy (AMPF) and passive monetary and active fiscal policy (PMAF) — is fit to various U.S. samples from 1955 to 2007.
- Data in the pre-Volcker periods strongly prefer an AMPF regime.
- The estimation for pre-Volcker samples is not very informative about whether the inflation coefficient in the interest rate rule exceeds one.
- Whether a government spending increase yields positive consumption in a PMAF regime depends on price stickiness.
- An income tax cut can yield a negative labor response if monetary policy aggressively stabilizes output.

### Model, Regimes, and Empirical Scope
- Model framework: New Keynesian model allowing for regime switches between AMPF and PMAF.
- Sample period: 1955 to 2007.
- Regimes defined:
  - AMPF: active monetary policy, passive fiscal policy.
  - PMAF: passive monetary policy, active fiscal policy.

### Key Findings and Results
- Pre-Volcker data strongly prefer the AMPF regime.
- Estimation is inconclusive about whether the inflation coefficient in the interest rate rule exceeds one in pre-Volcker samples.
- Government spending increases under PMAF:
  - The sign of the consumption response depends on price stickiness.
- Income tax cuts:
  - Can produce a negative labor response when monetary policy aggressively stabilizes output.

### Policy-Relevant Implications
- Interaction of fiscal and monetary regimes matters for macroeconomic transmission:
  - The effectiveness and sign of fiscal multipliers (e.g., government spending on consumption) depend on the monetary-fiscal regime and microfoundations such as price stickiness.
  - Monetary policy behavior (degree of output stabilization) can alter labor supply responses to fiscal measures like income tax cuts.
- Identification of regime (AMPF vs PMAF) is crucial when evaluating fiscal policy effects in historical samples.

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