Seminarios académicos y conferencias
"The Fiscal Origins of Monetary Paradoxes”
Coautor: Nicolás Caramp
26 Abril 2018 - 17:00 hrs.
Sala 209, Facultad de Ciencias Económicas y Administrativas UC
Abstract: We revisit the monetary paradoxes of standard monetary models in a liquidity trap and study the channels through which they occur. We focus on two paradoxes: the Forward Guidance Puzzle and the Paradox of Flexibility. First, we propose a decomposition of consumption into substitution and wealth effects, both of which take into account the general equilibrium effects on output and inflation, and we show that the substitution effect cannot account for the puzzles. Instead, monetary paradoxes are the result of strong wealth effects which, generically, are solely determined by the expected fiscal response to the monetary shocks. We estimate the fiscal response to monetary policy shocks with US data and find responses with the opposite sign to the ones implied by the standard equilibrium. Finally, we introduce the estimated fiscal responses into a medium-size DSGE model. We find that the impulse-response of consumption and inflation do not match the data, suggesting that wealth effects induced by fiscal policy may be important even outside of the liquidity trap. We show that models with constrained agents can produce strong wealth effects if gross private debt is different than zero.