Fiscal Stimulus and the Systematic Response of Monetary Policy

Economic theory suggests that the effects of fiscal stimulus can vary substantially with the systematic response of monetary policy. Empirical estimates of the causal effects of fiscal shocks implicitly embed a particular monetary reaction: they provide treatment effects that average across in-sample monetary policy. Building on McKay and Wolf (2022), I discuss how evidence on monetary policy shocks can be used to predict the effects of fiscal stimulus under arbitrary monetary policy reaction. I review the underlying theory, propose a simple empirical strategy, and present an application.