Identifying the Stance of Monetary Policy at the Zero Lower Bound: A Markov-Switching Estimation Exploiting Monetary-Fiscal Policy Interdependence

32 Pages Posted: 7 Dec 2014

See all articles by Manuel González-Astudillo

Manuel González-Astudillo

Board of Governors of the Federal Reserve System; Escuela Superior Politécnica del Litoral (ESPOL) - School of Social Sciences and Humanities

Date Written: September 19, 2014

Abstract

In this paper, I propose an econometric technique to estimate a Markov-switching Taylor rule subject to the zero lower bound of interest rates. I show that incorporating a Tobit-like specification allows to obtain consistent estimators. More importantly, I show that linking the switching of the Taylor rule coefficients to the switching of the coefficients of an auxiliary uncensored Markov-switching regression improves the identification of an otherwise unidentifiable prevalent monetary regime. To illustrate the proposed estimation technique, I use U.S. quarterly data spanning 1960:1-2013:4. The chosen auxiliary Markov-switching regression is a fiscal policy rule where federal revenues react to debt and the output gap. Results show that there is evidence of policy co-movements with debt-stabilizing fiscal policy more likely accompanying active monetary policy, and vice versa.

Keywords: Markov-switching coefficients, zero lower bound, monetary-fiscal policy interactions

JEL Classification: C34, E52, E63

Suggested Citation

González-Astudillo, Manuel, Identifying the Stance of Monetary Policy at the Zero Lower Bound: A Markov-Switching Estimation Exploiting Monetary-Fiscal Policy Interdependence (September 19, 2014). FEDS Working Paper No. 2014-97, Available at SSRN: https://ssrn.com/abstract=2534535 or http://dx.doi.org/10.2139/ssrn.2534535

Manuel González-Astudillo (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Escuela Superior Politécnica del Litoral (ESPOL) - School of Social Sciences and Humanities

Guayaquil
Ecuador

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