Patrizio Tirelli

Monetary and Fiscal Policy Interactions over the Cycle: Some Empirical Evidence

This paper estimates VAR models to examine the response of monetary and fiscal policy to macroeconomic targets, and the interdependence between the two policy instruments. The models are estimated for a number of G7 countries. Our findings show that, whilst monetary and fiscal policy are increasingly used as strategic complements, the responsiveness of fiscal policy to the business cycle has decreased since the 1980s. We also demonstrate that shifts in the strategic interdependence between fiscal and monetary policy can be captured using Bayesian VAR models.

Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform and Interest Rate Policy in the OECD Countries

We estimate forward-looking interest-rate reaction functions for the G3 economies and for a group of countries which recently adopted inflation targets. Some significant shifts in the conduct of monetary policy are detected in the G3 countries, especially in the USA and Japan. In contrast with popular wisdom, it is only since the 1990s that policies in these countries begin to look consistent with an inflation-targeting regime. In addition, the introduction of inflation targeting and central bank reforms in countries like Sweden, Canada and New Zealand has not led to major changes in the way in which central banks react to the objectives of economic policy. In all cases changes in policy behaviour pre-date the introduction of inflation targets and central bank reforms. The paper challenges the one-size-fits-all attitude towards modern central bank policymaking which permeates a great deal of the current literature.

Unemployment and growth: some empirical evidence from structural time series models

This study investigates the empirical relationship between unemployment and growth in a number of OECD economies. A structural time series model is used for labour productivity growth to demonstrate that, in most economies, there seems to be a negative correlation between unemployment and labour productivity growth. The results provide little support for the theory that recessions may stimulate productivity growth. The use of a structural time series approach allows an attempt to model the underlying dynamics of productivity growth jointly with the effect of unemployment.

Estimating a DSGE Model with Limited Asset Market Participation for the Euro Area

We estimate a medium scale DSGE model for the Euro Area to gain intuition on the importance of Limited Asset Market Participation (LAMP). Our results suggest that LAMP is sizeable (39% of households over the 1993-2012 sample) and important to understand EMU business cycle, especially, in the light of the recent financial crisis. In comparison with the representative households counterpart, the LAMP model is preferred on the grounds of both the Bayes factor and the average forecasting performance. Given the tighter credit standards we might expect in the near future, the high proportion of LAMP households is likely to remain an important feature of EMU. We also find that the LAMP model leads to conclusions about the main determinants of EMU business cycle that are substantially different from those obtained under the representative agent hypothesis. Given these results, the LAMP hypothesis should be part and parcel of empirical DSGE models of the Euro area.

Fiscal and Monetary Policy Interactions in a New Keynesian Model with Liquidity Constraints

This paper derives a New Keynesian dynamic general equilibrium model with liquidity constrained consumers and sticky prices. The model allows a role for both government spending and taxation in the DGE model. The model is then estimated using US data. We demonstrate that there seems to be a significant role for rule-of-thumb consumer behaviour. Our model is then used to analyse the interaction between fiscal and monetary policies. We examine the extent to which fiscal policy (automatic stabilisers) assist or hinder monetary policy when the latter takes a standard forward-looking inflation targeting form. We also examine the extent to which inertia in fiscal policy and the presence of rule-of-thumb consumers affects output and inflation variability in the presence of such a monetary policy rule.

Limited Asset Market Participation, Income Inequality and Macroeconomic Volatility

By introducing external consumption habits and Limited Asset Market Participation in an otherwise standard New Keynesian DSGE model we uncover a causality link between limited asset market participation, consumption inequality and macroeconomic volatility. We also obtain that monetary contractions have redistributive effects in favour of asset holders, broadly confirming the findings in Coibion et al. (2012). Finally we analyze the impact of redistributive fiscal policies that target consumption inequality between households groups. Such policies have beneficial implications for macroeconomic stability, bringing the dynamic performance of the model close to the one generated by representative-agent DSGE models.

Economic and Socio-Political Determinants of de Facto Monetary Institutions and Inflationary Outcomes

In this paper we estimate a model where inflation, a measure of de facto central bank independence and an index of de facto exchange rate regime are simultaneously determined by a set of economic, political and institutional variables. De facto central bank independence is hampered by socio-political turbulence and benefits from the balance of powers between the executive and the parliament. Inflation is explained by de facto central bank independence, by the level and volatility of public expenditure and by the de facto exchange rate regime. Openness (real and financial) affects inflation through the exchange rate regime channel. Success in controlling inflation, in turn is crucial to sustain central bank independence and exchange rate stability.

Monetary Policy on the Road to EMU: The Dominance of External Constraints on Domestic Objectives

We estimate forward-looking interest-rate reaction functions Exchange Rate Model for four ERM countries. Reputational factors and convergence to the German inflation rate are found to be the main policy goals. We cannot detect evidence that the target zone band was exploited to implement countercyclical policies: Thus, their enthusiastic joining of EMU is not particularly surprising, as the ECBs policies are more likely to take into account their national preferences than the Bundesbank did under the ERM regime.

Incomplete Information in Monetary Policy Games: Rules Rather Than a Conservative Central Banker

Time inconsistency in monetary policy can be addressed appointing a conservative central banker. But incomplete information about the central bankers preferences impairs the performance of delegation schemes. Firstly, the ensuing ex ante variability of monetary response lowers welfare. Secondly, partial independence schemes may prove inadequate because reputation--not only legal arrangements--defines the actual degree of independence. The incumbent may exploit his reputation to impose too conservative policies, whereas if he lacks reputation, partial independence forces him to accommodate. As a result, simple rules may be preferred. Copyright 1998 by Scottish Economic Society.

The comeback of inflation as an optimal public finance tool

We challenge the widely held belief that New Keynesian models cannot predict optimal positive inflation rates. In fact, interest rates are justified by the Phelps argument that monetary financing can alleviate the burden of distortionary taxation. We obtain this result because, in contrast with previous contributions, our model accounts for public transfers as a component of fiscal outlays. We also contradict the view that the Ramsey policy should minimize inflation volatility and induce near-random-walk dynamics of public debt in the long run. In our model it should instead stabilize debt-to-GDP ratios in order to mitigate steady-state distortions. Our results thus provide theoretical support to policy-oriented analyses which call for a reversal of debt accumulated in the aftermath of the 2008 financial crisis.