What is the Importance of Monetary and Fiscal Shocks in Explaining US Macroeconomic Fluctuations?

33 Pages Posted: 25 Jan 2011 Last revised: 6 Feb 2011

See all articles by Barbara Rossi

Barbara Rossi

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Barcelona Graduate School of Economics

Sarah Zubairy

Texas A&M University - Department of Economics

Date Written: January 15, 2011

Abstract

This paper analyzes the importance of monetary and fiscal policy shocks in explaining US macroeconomic fluctuations, and establishes new stylized facts. The novelty of our empirical analysis is that we jointly consider both monetary and fiscal policy, whereas the existing literature only focuses on either one or the other. Our main findings are twofold: fiscal shocks are relatively more important in explaining medium cycle fluctuations whereas monetary policy shocks are relatively more important in explaining business cycle fluctuations; and failing to recognize that both monetary and fiscal policy simultaneously affect macroeconomic variables might incorrectly attribute the fluctuations to the wrong source.

Keywords: Monetary policy, government spending, fiscal policy, business cycle fluctuations, medium cycle

JEL Classification: E1, E5, E6, C5

Suggested Citation

Rossi, Barbara and Zubairy, Sarah, What is the Importance of Monetary and Fiscal Shocks in Explaining US Macroeconomic Fluctuations? (January 15, 2011). Economic Research Initiatives at Duke (ERID) Working Paper No. 91, Available at SSRN: https://ssrn.com/abstract=1747192 or http://dx.doi.org/10.2139/ssrn.1747192

Barbara Rossi (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Sarah Zubairy

Texas A&M University - Department of Economics ( email )

5201 University Blvd.
College Station, TX 77843-4228
United States

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