Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212445 
Year of Publication: 
2019
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 11/2019
Publisher: 
Bank of Finland, Helsinki
Abstract: 
It is widely recognized that the policy objectives of fiscal and monetary policymakers usually have different time horizons, and this feature may not be captured by traditional econometric techniques. In this paper, we first decompose U.S macroeconomic data using a time-frequency domain technique, namely discrete wavelet analysis. We then model the behavior of the U.S. economy over each wavelet frequency range and use our estimated parameters to construct a tracking model. To illustrate the usefulness of this approach, we simulate jointly optimal fiscal and monetary policy with different short-term targets: an inflation target, a money growth target, an interest rate target, and a real exchange rate target. The results determine the reaction in fiscal and monetary policy that is required to achieve an inflation target in a low inflation environment, and when both fiscal and monetary policy are concerned with meeting certain economic growth objectives. The combination of wavelet decomposition in an optimal control framework can also provide a new approach to macroeconomic forecasting.
JEL: 
C61
C63
C88
E52
E61
F47
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-279-2
Document Type: 
Working Paper

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