Benchmark Case Study: Response To Interest Rate Shocks
Structure of the Analysis
Design The experiment wants to compare the steady state level of the economy for all the models, which is considered the baseline case, in period 0, to a state where the economy experiences an unanticipated scal or monetary shock, in period 1.
The monetary shocks considered are shocks to the interest rate reaction function equal to 1% compared to the steady-state value for one year. The temporary scal policy shocks correspond to an increase in spending or a decline in revenue for the government of 1% of the baseline GDP, for two years. A permanent shock, instead, consists on a permanent increase in government spending equal to 1% of the steady-state GDP.
Benchmark Case: Response to Interest Rate Shocks The authors …show more content…
E ects of a Temporary Stimulus The authors then analyze the e ects of di erent temporary scal stimuluses in di erent scenarios of monetary accommodation, which can be de ned as an expan- sive monetary policy aimed at boosting the economy. Precisely, they want to assess how each type of scal action a ects the economy under three di erent degrees of monetary accommodation, that are: no accommodation, one-year accommodation, and two-years accommodation. The assessment is conducted to verify the possibility for a scal action to be more e ective in the case of accommodating monetary authorities. This will allow us to expand Niemann and Von Hagen's results and to gain more insights on how coordination can a ect the economic outcomes, by taking di erent scal mea- sures under consideration.
The rst policy action under examination is government consumption, which is assumed to be of the same size of the stimulus enacted in the US during the years 2009-2010. In case of no monetary accommodation, the models display multipliers between 0.7 and 1, by enacting the estimation for both
US and Europe. The multipliers are very low because the increase in government demand boosts output, so the resulting …show more content…
Finally, diminishing taxation on cor- porate income has nearly no impact, due to the just-temporary duration of the stimulus and to the presence of adjustment costs.
The other type of transfers we need to consider is those ones aimed just at the nancially constrained households. The objective of such a policy action is to move the resources of the economy, targeting the groups which need them at most. In this case, the economy responds much more to the stimulus,
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showing higher multipliers, especially in those models with a low share of constrained individuals, which are BoC-GEM and GIMF. As before, the outcome is enlarged (almost doubled) when the mon- etary authority accommodates, because the decrease in real interest rates has a positive e ect also on the permanent income households, instead of crowding it out.
E ects of a Permanent Stimulus Afterwards, the authors examine how the previously-obtained results might change in case of a scal policy action perceived to be permanent. If the government consumption, for example, is increased up to ve years, under two-years monetary accommodation, there is an initial boost for the multiplier during the rst two to three years, followed by a
Design The experiment wants to compare the steady state level of the economy for all the models, which is considered the baseline case, in period 0, to a state where the economy experiences an unanticipated scal or monetary shock, in period 1.
The monetary shocks considered are shocks to the interest rate reaction function equal to 1% compared to the steady-state value for one year. The temporary scal policy shocks correspond to an increase in spending or a decline in revenue for the government of 1% of the baseline GDP, for two years. A permanent shock, instead, consists on a permanent increase in government spending equal to 1% of the steady-state GDP.
Benchmark Case: Response to Interest Rate Shocks The authors …show more content…
E ects of a Temporary Stimulus The authors then analyze the e ects of di erent temporary scal stimuluses in di erent scenarios of monetary accommodation, which can be de ned as an expan- sive monetary policy aimed at boosting the economy. Precisely, they want to assess how each type of scal action a ects the economy under three di erent degrees of monetary accommodation, that are: no accommodation, one-year accommodation, and two-years accommodation. The assessment is conducted to verify the possibility for a scal action to be more e ective in the case of accommodating monetary authorities. This will allow us to expand Niemann and Von Hagen's results and to gain more insights on how coordination can a ect the economic outcomes, by taking di erent scal mea- sures under consideration.
The rst policy action under examination is government consumption, which is assumed to be of the same size of the stimulus enacted in the US during the years 2009-2010. In case of no monetary accommodation, the models display multipliers between 0.7 and 1, by enacting the estimation for both
US and Europe. The multipliers are very low because the increase in government demand boosts output, so the resulting …show more content…
Finally, diminishing taxation on cor- porate income has nearly no impact, due to the just-temporary duration of the stimulus and to the presence of adjustment costs.
The other type of transfers we need to consider is those ones aimed just at the nancially constrained households. The objective of such a policy action is to move the resources of the economy, targeting the groups which need them at most. In this case, the economy responds much more to the stimulus,
7
showing higher multipliers, especially in those models with a low share of constrained individuals, which are BoC-GEM and GIMF. As before, the outcome is enlarged (almost doubled) when the mon- etary authority accommodates, because the decrease in real interest rates has a positive e ect also on the permanent income households, instead of crowding it out.
E ects of a Permanent Stimulus Afterwards, the authors examine how the previously-obtained results might change in case of a scal policy action perceived to be permanent. If the government consumption, for example, is increased up to ve years, under two-years monetary accommodation, there is an initial boost for the multiplier during the rst two to three years, followed by a