(Re)Evaluating recent macroeconomic policy in the US

Abstract

We build and estimate a small-scale DSGE mogement of the University of Porto, Rua Dr. Roberto Frias S/N, 4200-464 Porto, Portugaldel of the US, where policy is described as the strategic interaction between monetary and fiscal policy makers following targeting rules. We use this model to analyse the two episodes where interest rates hit their zero lower bound (ZLB). We find that changing fiscal policy objectives, adopting suitably designed fiscal packages or a temporary price level target could have generated a partial lift-off from the ZLB following the financial crisis. However, under the latter two devices we would have returned to the ZLB. We find that the duration of the ZLB of 2020 was two quarters too long, and the Trump-Biden fiscal stimulus was inflationary, but even taken together, these factors do not wholly explain the subsequent hike in inflation, which instead is predominantly due to the lingering effects of Covid-era shocks.