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Nick, I think what you are saying is that the paper isnt identifying fiscal and monetary shocks? Sounds like what is probably happening is that both monetary and fiscal are responding to the same event (frankly probably dominated by 2008-9), rather than a causal link between the two? I dont think that means you can draw any conclusions about fiscal multipliers at all?

THSL: I have serious doubts about whether econometric methods (like VARs) can identify monetary shocks when the central bank is doing something sensible like targeting inflation. And maybe the same is true for identifying fiscal policy shocks, if the government is responding to macro events. But I'm not sure if that is what is going on in this paper. It is indeed a puzzle that a positive fiscal shock would cause the Fed to cut the nominal rate. Maybe both are responding to the same negative shock. Dunno. You might be right.

But if there were some hidden negative macro shock to which both monetary and fiscal were responding, it would be puzzling if the IRF shows a subsequent *increase* in GDP, unless the lags work out just right.

Isn't it a mistake to lump together under "fiscal policy" expenditure that directly creates jobs and puts the re-circulation of money into motion and either handing out money or taxing less of it in hopes that it will result in expenditures that create jobs? If that's not part of the model, isn't that a flaw in the model?

"Fiscal Policy works as advertised" is the part I find interesting.

Having taken Prof. Coe's excellent graduate level course on Economic History, I was lucky enough to have guidance in comparing and contrasting the Great Depression and the Great Recession. We, of course, looked at monetary and fiscal policy.

One of the take-aways from that research (for me, Prof. Coe might disagree) was that regime change was crucial in turning the tide. The New Deal (1933-34) delivered coordinated monetary and fiscal policy representing regime change. The New Deal took the US off the gold standard (monetary policy was changed dramatically) and at the same time fiscal stimulus was introduced (which, at the time, was very controversial). In reality the fiscal stimulus was meager, and at times contradictory, but it created expectations for inflation. Not surprisingly there is little evidence of a fiscal multiplier greater than 1 for the New Deal fiscal policies.

The government, by introducing fiscal measures, signaled it would pursue inflationary policies. Not normally how fiscal stimulus is advertised but it was really the largest "fiscal" component of the regime change of 1933-34.

One might consider this grasping for some evidence, any evidence, that fiscal policy "works". It wasn't until the start of WWII that any sustained fiscal stimulus was implemented. By that time a good deal of the heavy lifting for recovery would reasonably be seen as coming from the increasing money supply - e.g. as capital flew out of Europe in the late 1930's. It is just that the recovery took ten long years.

Contrasting the Great Depression and the Great Recession - I would say that both started with negative shocks of roughly the same order of magnitude but the depth was worse for the Great Depression. Critical differences include the presence in 2008 of flexible exchange rates and the existence of automatic stabilizers (Lender of Last Resort, deposit insurance, unemployment insurance) - again a coordinated policy regime.

Kathleen: from what I have read about 1933 US, the regime change did indeed seem crucial in creating the recovery. An announced higher price level target, along with raising the dollar price of gold. But I would think of this more as monetary than fiscal policy. Scott Sumner discusses this episode, and David Glasner too, like in his most recent post: http://uneasymoney.com/2015/06/04/repeat-after-me-inflations-the-cure-not-the-disease/

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