Abstract
August 19, 2003
Straub Roland (European University Institute)
Fiscal Multipliers and Monetary Policy Rules: Bridging Theory with Evidence
This paper argues that theoretical effects of fiscal policy shocks can be consistent with empirical predictions, and hence provides microfoundations for fiscal multipliers. Most notably, it matches observed private consumption dynamics and its correlation with hours in response to a government spending shock. This match is a?ected quantitatively but not qualitatively by whether spending is tax or deficit financed, by relative weights distortionary and lump-sum taxes have for adjustment. Key to our results is a close look at the monetary policy rule, in line with recent theoretical and empirical work in the field. For our purpose, we use a standard dynamic general equilibrium model with moderate amounts of rigidities. Most importantly, there is a fraction of agents (labeled as ’hedonistic’) who have an elastic labor supply but no asset holdings.