Economic Models - Convex Optimization

Topic 2
Time Varying Responses of Output to Monetary
and Fiscal Policy
Dipak R. Basu
Nagasaki University, Nagasaki, Japan
Alexis Lazaridis
Aristotle University of Thessalonikki, Greece
1. Introduction
There are large volumes of literatures on the effectiveness of monetary and
fiscal policies and on lags in the effects of monetary policies (Friedman and
Schwartz, 1963; Hamburger, 1971; Meyer, 1967; Tobin, 1970). Although
the lengths of lags are important in determining the role of monetary-fiscal
policies, the relationship between money and income vary over time due
to changes in the lag structure. Mayer (1967), Poole (1975) and Warburton
(l971) attempted to analyze the empirical variability of the lag structure
by analyzing the turning points in general business activity. Sargent and
Wallace (1973) as well as Lucas (1972) have drawn attention to the role of
time-dependant response coefficients to changes in stabilization policies.
Cargill and Meyer (1977; 1978) have estimated the time-varying relationship
between national income and monetary-fiscal policies. The results
then indicated existences of time variations and exclusions of time variations
of the coefficients, lead to exclusions of prior information inherent in
the models from the estimation process. Blanchard and Perotti (2002) as
well as Smets and Wouters (2003) have obtained similar characteristics of
the monetary and fiscal policy.
The existence of time dependency of effects of monetary fiscal policies,
reflects considerable doubts on the policy prescription based on constant
coefficient estimates. However, more reasonable results can be obtained if
we try to estimate dynamics and movements of these relationships over
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