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Barcelona GSE Working Paper No. 647

Title: Shocking Policy Coefficients
Authors: Luca Gambetti
Date: 31-05-2012
Keywords: Policy regime change, Tims-varying coefficients VAR, Parameter identification, Fiscal policy rules, Countercyclical fiscal policy
JEL Codes: C32, E62
Abstract:
This paper proposes an empirical framework to study the effects of a policy regime change defined as an unpredictable and permanent change in the policy parameters. In particular I show how to make conditional forecast and perform impulse response functions and counterfactual analysis. As an application, the effects of changes in fiscal policy rules in the US are investigated. I find that discretionary fiscal policy has become more countercyclical over the last decades. In absence of such a change, surplus would have been higher, debt lower and output gap more volatile but only until mid 80s. An increase in the degree of counter-cyclicality of fiscal policy has a positive effect on output gap in periods where the level of debt-to-GDP ratio is low and a zero or negative effect when the ratio is high. This explains why a more countercylical stance of the systematic fiscal policy taking place in 2008:II is predicted to be rather ineffective for recovering from the crisis.
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