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Monetary and Fiscal Policy Switching
[report]
2004
unpublished
A growing body of evidence finds that policy reaction functions vary substantially over different periods in the United States. This paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a Markov process can change the impacts of policy shocks. In one regime monetary policy follows the Taylor principle and taxes rise strongly with debt; in another regime the Taylor principle fails to hold and taxes are exogenous. An example shows that a unique
doi:10.3386/w10362
fatcat:ldk4yeeyabhhjawfmcmulht7w4