Monetary - fiscal joint policy analysis: a regime switching DSGD model

Abstract

Recent literature on the macroeconomic theory examines the importance of the regime switching in macroeconomic dynamics. Using a regime switching structure, this paper studies a baseline New Keynesian model with fiscal block where regimes are deffined as active monetary passive fiscal (AMPF) and passive monetary active fiscal (PMAF) regimes. In this paper, I demonstrate that the dynamics of aggregate variables differ markedly when non-linear regime switching solutions are considered. To be specific, output and in ation level are more sensitive to the monetary policy shock under PMAF regime and more sensitive to the technological shocks under AMPF regime.