Essays on Inflation Dynamics, Economic Fluctuations and Fiscal Policy

Download or read book Essays on Inflation Dynamics, Economic Fluctuations and Fiscal Policy written by Kuo-Hsuan Chin and published by . This book was released on 2015 with total page 108 pages. Available in PDF, EPUB and Kindle. Book excerpt: Inflation dynamics and the quantitative effects of fiscal policy remain topics of debates. The mixed results may due to the use of inappropriate models. To reconcile the mixed estimates of inflation dynamics, I generalized a hybrid New Keynesian Phillips Curve model developed by Gali and Gertler (1999) with time varying parameters. I find the model with fixed parameters is possibly a misspecified model since the estimated parameters are not stable over time. In consequence, a suitable model for explaining inflation dynamics should account for the time varying feature of parameters. To further investigate the mixed results on the quantitative effects of fiscal policy, I use a sophisticated DSGE model proposed by Smets and Wouters (2007), and simplify it to other 15 DSGE sub-models by imposing a tight prior on a single parameter or a combination of tight priors on multiple parameters. I estimate all sixteen models using Bayesian approach and obtain the qualitative and quantitative effect of fiscal stimulus in all models, which are comparable with currently empirical studies. I pick up a suitable model via Bayes factor and then forecast the effect of fiscal stimulus in a scenario looks like U.S. 2008/2009 economic recessions. I find a positive short-run effect but a negative long run consequence of fiscal stimulus.