Monetary Policy Inertia and Fiscal Multipliers

Dynare help (legacy posts)
1

Hey everyone,

I’m examining fiscal multipliers (cumulative) under a NK framework and I want to simulate them under a standard Taylor rule and under a rule with inertia. When I impose the ZLB (dummy_mp=1) and the government spending exceeds its duration, the multiplier is higher given inertia in the model, which makes sense as the central authority responds slower after the end of the ZLB. However, when there is no ZLB in the model (dummy_mp = 0) and I shock the economy I get a cumulative multiplier of 0.95 with a standard Taylor rule and a multiplier of 0.90 with an inertial rule (gamma_lag = 0.85). This doesn’t make sense as I expect the inertia to increase the output generated following the fiscal shock. I don’t know what am I doing wrong and why policy inertia works with the ZLB and not without it.

I also provide my code. I would appreciate any advice.

Thank you in advance.

2

This is hard to say. There might be some economic intuition to what is going on. You might want to consult the relevant literature and check what happens in a very simple model where the Taylor rule only includes inflation.