Preprint C16/2003
Three Essays on Monetary and Fiscal Policy in Dynamic General Equilibrium Models
DDIC
Keywords:
Monetary Policy Rules | Search
In the first part, we use a dynamic general equilibrium model with two market frictions to study two things. First, the dynamic response of a few key macroeconomic variables to each one of three exogenous shocks: monetary, government spending and technological shocks. We address the ability of the model to simulate data embedded with the same dynamic response to shocks observed in historical data (i.e. we estimate dynamic multipliers to exogenous shocks by estimating a VARX model to both sets of data). And second, the performance, in terms of volatility and welfare, of different monetary policy rules. The frictions considered are a financial friction that highlights the credit channel as the monetary transmission mechanism and a labor market friction that considerably amplifies the effects of monetary policy. In the second part we address and document the following stylized fact: Whereas in the G-7 countries government consumption is essentially acyclical, in developing countries it appears to be highly procyclical. We show that such differences in the procyclicality of government consumption are entirely consistent with a standard neoclassical model of optimal fiscal policy. We argue that the degree of market incompleteness is enough to explain the above "puzzle?.