Empirical evidence on the monetary-fiscal policy mix and macroeconomic (in)stability in the U.S.
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Abstract
This paper investigates the fiscal-monetary policy mix in the U.S. using econometric methods that are robust to weak instruments and exploit information in structural changes. We find that the post-WWII economy is mainly characterised by an active monetary-passive fiscal policy regime, though we cannot preclude the Fiscal Theory of the Price Level during the 1960s and ’70s owing to a passive monetary-active fiscal policy mix. Nevertheless, our findings suggest that self-fulfilling inflationary expectations and sunspot fluctuations, induced by a passive monetary-passive fiscal policy mix, can be ruled out as an explanation of the Great Inflation episode.
