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Are governments able to lean against the macroeconomic wind?

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  • David Kiefer

Abstract

A standard model of activist macroeconomic policy derives a monetary reaction rule by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve. In addition to monetary policy governments apply a variety of instruments to influence inflation and output, including fiscal policy, bailouts and exchange rates. Solving the Phillips curve and reaction rule for a reduced form, we study this model with a panel of OECD countries. A textbook version of the activist model leads to implausible results. The econometric results are much enhanced by accounting for serial correlation among output shocks. Our results suggest that governments do lean against inflation shocks, but not output shocks, although the flatness of the Phillips curve limits policy makers ability to effective lean against the wind. Furthermore, the activist model fits the data only slightly better than a flat-Phillips-curve benchmark. Some results are unexpected, like the estimated slope of the Phillips curves and the implied stabilization behavior of Finland, Japan and US policy makers.

Suggested Citation

  • David Kiefer, 2013. "Are governments able to lean against the macroeconomic wind?," Working Paper Series, Department of Economics, University of Utah 2013_14, University of Utah, Department of Economics.
    • Handle: RePEc:uta:papers:2013_14
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    More about this item

    Keywords

    stabilization policy; inflation targets; expectations JEL Classification: E61; E63;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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