Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/313884 
Authors: 
Year of Publication: 
2025
Series/Report no.: 
DIW Discussion Papers No. 2109
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
In macroeconomic models featuring borrowing-constrained agents, the effects of monetary policy depend on the fiscal reaction to interest rate changes. This paper presents new evidence on the dynamic causal effects of U.S. monetary policy shocks on fiscal instruments and estimates a Heterogeneous Agent New Keynesian model with fiscal feedback rules to match the empirical results. I find that U.S. fiscal policy responds to monetaryinduced output contractions with debt-financed, countercyclical tax and transfer policies, amid a gradual decline in spending to accommodate the debt increase. The model implies that monetary policy unopposed by a business cycle stabilization motive of fiscal policy would be roughly one third more contractionary.
Subjects: 
Macroeconomic policy
HANK
monetary fiscal interaction
Impulse Response Matching
JEL: 
E21
E52
E60
E63
Document Type: 
Working Paper

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