Essays in Monetary and Fiscal Policy

This dissertation studies monetary and fiscal policy by utilizing state-of-the-art dynamic modeling and empirical methods. In the first chapter, I study government debt and its impact on business cycles. I identify exogenous government debt shocks using high-frequency movements in US Treasury futures prices around auction announcements. In a vector auto-regression, these shocks raise interest rates across the yield curve while prices increase, output falls, unemployment rises, and the money supply shrinks. I interpret these findings as evidence of fiscal dominance and show that a standard monetary-dominant model cannot replicate the empirical impulse responses. In an estimated business cycle model, I find that debt shocks offset part of the disinflation of the 1980s, contributed to growth in the 1990s, and slowed the recovery from the Great Recession. In the second chapter, I embed a nominal GDP level target in a Taylor-type rule and compare the volatilities of output, inflation, and the nominal rate to a standard, inflation-target Taylor rule. I demonstrate analytically that the source of the shock matters for relative variances. With an NGDP level target, a productivity shock results in more stable output but more volatile inflation. Cost push shocks and demand shocks result in more stable output and inflation. These results are, with small caveats, confirmed in an estimated quantitative model. Last, I impose a zero lower bound (ZLB) and simulate the model under both targets. An NGDP level target hits the ZLB less often than an inflation target at the cost of longer sessions at the ZLB. Switching to an NGDP level target while at the ZLB leads to quicker economic recovery through the Fed's use of forward guidance. In the third chapter, my coauthors and I use a Heterogeneous Agent New Keynesian (HANK) model to quantify the distribution of welfare gains and losses of the United States Volcker disinflation. In the long run households prefer low inflation, but the Volcker disinflation requires a transition period characterized by a sharp increase in the real interest rate and unemployment, as well as a redistribution from net nominal borrowers to net nominal savers. We calibrate the model to match the micro and macro moments of the late 1970s high-inflation environment and examine the actual changes in the nominal interest rate and inflation over the Volcker disinflation. While aggregate welfare gains are positive, the effects are highly skewed across households; almost 50 percent would prefer to avoid the disinflation. This share depends negatively on the liquidity value of money, positively on the average duration of nominal borrowing, and positively on the short-run increase in the real interest rate and unemployment. Each of these chapters employs a different methodological approach, but the end goal is the same: to study how government monetary and fiscal policy impact business cycles. Chapter one examines this question through government financing; chapter two through monetary policy targets; chapter three through a change in the United States' monetary stance toward inflation. Together, these chapters contribute new insights on how monetary and fiscal tools impact output, inflation, and household welfare.