Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Bank of Finland Research Discussion Papers, Bank of Finland

No 12/2015:
Euro area monetary and fiscal policy tracking design in the time-frequency domain

Patrick Crowley () and David Hudgins ()

Abstract: This paper first applies the MODWT (Maximal Overlap Discrete Wavelet Transform) to Euro Area quarterly GDP data from 1995 – 2014 to obtain the underlying cyclical structure of the GDP components. We then design optimal fiscal and monetary policy within a large state-space LQ-tracking wavelet decomposition model. Our study builds a MATLAB program that simulates optimal policy thrusts at each frequency range where: (1) both fiscal and monetary policy are emphasized, (2) only fiscal policy is relatively active, and (3) when only monetary policy is relatively active. The results show that the monetary authorities should utilize a strategy that influences the short-term market interest rate to undulate based on the cyclical wavelet decomposition in order to compute the optimal timing and levels for the aggregate interest rate adjustments. We also find that modest emphasis on active interest rate movements can alleviate much of the volatility in optimal government spending, while rendering similarly favorable levels of aggregate consumption and investment. This research is the first to construct joint fiscal and monetary policies in an applied optimal control model based on the short and long cyclical lag structures obtained from wavelet analysis.

Keywords: discrete wavelet analysis; euro area; fiscal policy; LQ tracking; monetary policy; optimal control; (follow links to similar papers)

JEL-Codes: C49; C61; C63; C88; E52; E61; (follow links to similar papers)

47 pages, August 12, 2015

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

BoF_DP_1512.pdf?sequence=1    PDF-file
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:bofrdp:2015_012 This page was generated on 2015-08-19 16:37:25