Nelson Hall 4108, Box 8110
Raleigh NC, 27695

Nora Traum
North Carolina State University







  • When Does Government Debt Crowd Out Investment?  Joint with Shu-Chun S. Yang. Journal of Applied Econometrics, forthcoming.
    We examine when government debt crowds out investment for the U.S. economy using an estimated New Keynesian model with detailed fiscal specifications and accounting for monetary and fiscal policy interactions. Whether investment is crowded in or out in the short term depends on policy shocks triggering debt expansions: Higher debt can crowd in investment for cutting capital tax rates or increasing government investment. Contrary to the conventional view, no systematic relationships between real interest rates and investment exist, explaining why reduced-form regressions are inconclusive about crowding-out. At longer horizons, distortionary financing is important for the negative investment response to debt.  Online Appendix.

  • Estimating Fiscal Limits: The Case of Greece.   Joint with Huixin Bi. Journal of Applied Econometrics, forthcoming.
    This paper uses Bayesian methods to estimate a real business cycle model that allows for interactions among fiscal policy instruments, the stochastic 'fiscal limit,' and sovereign default. Using the particle filter to perform likelihood-based inference, we estimate the full nonlinear model with post-EMU data until 2010Q4. We find that 1) the probability of default on Greek debt was in the range of 5% to 10% in 2010Q4 and 2) the 2011 surge in the Greek real interest rate is within model forecast bands. The results suggest that a nonlinear rational expectations environment can account for the Greek interest rate path. Online Appendix.

  • Estimating Sovereign Default Risk. Joint with Huixin Bi. American Economic Review Papers and Proceedings, 102(3), May 2012: 161-166
    This paper uses Bayesian methods to estimate the sovereign default probability for Greece and Italy in the post-EMU period. We build a real business cycle model that allows for interactions among fiscal policy instruments, sovereign default risk, and a "fiscal limit," which measures the maximum level of debt the government is willing to finance. We estimate the full nonlinear model using likelihood inference methods. Although we find that Greece historically had a lower default probability than Italy for a given debt level, our estimates suggest that the Italian government is more willing to service debt than the Greek government.  Technical Appendix.

  • Monetary and Fiscal Policy Interactions in the Post-War U.S.  Joint with Shu-Chun S. Yang. European Economic Review, 55(1), January 2011: 140-164
    A New Keynesian model allowing for both an active monetary and passive fiscal policy (AMPF) regime and a passive monetary and active fiscal policy (PMAF) regime is estimated to fit various samples from 1955 to 2007. We find that the U.S. data in the pre- Volcker period strongly prefer an AMPF regime, even with a prior centered in the PMAF region. However, the estimation is not very informative about whether the monetary authority’s reaction to inflation is greater than one-for-one in the pre-Volcker period, as much lower values can still preserve determinacy under passive fiscal policy. In addition, we find that whether a PMAF regime can generate consumption growth following a government spending increase depends on the degree of price stickiness. An income tax cut can generate an unusual negative labor response if monetary policy aggressively stabilizes output growth.

  • Dynamics of Fiscal Financing in the United States.  Joint with Eric M. Leeper and Michael Plante. Journal of Econometrics, 156(2), June 2010: 304- 321
    General equilibrium models that include policy rules for government spending, lump-sum transfers, and distortionary taxation on labor and capital income and on consumption expenditures are fit to U.S. data under rich specifications of fiscal policy rules to obtain several results. First, the best-fitting model allows many fiscal instruments to respond to debt. Second, responses of aggregates to fiscal policy shocks under rich rules vary considerably from responses where only non-distortionary fiscal instruments finance debt. Third, in the short run, all fiscal instruments except labor taxes react strongly to debt, but long-run intertemporal financing comes from all components of the government's budget constraint. Fourth, debt-financed fiscal shocks trigger long lasting dynamics; short- and long-run multipliers can differ markedly. Estimation Appendix.

  • Working Papers:

  • Time-Varying Oil Price Volatility and Macroeconomic Aggregates.
      Joint with Michael Plante.             
    This paper studies how exogenous changes in oil price uncertainty affect GDP and other macroeconomic variables. To identify exogenous changes in oil price uncertainty in a VAR, we introduce an article count index related to OPEC, which rises following important OPEC meetings, political upheaval in OPEC nations, and terrorist attacks. Positive innovations in the index lead to increased oil price uncertainty and small but statistically significant declines in the growth rate of U.S. real GDP. A New Keynesian model in which oil usage is required for the utilization of both capital and durable goods also produces declines in GDP and other macroeconomic variables following an increase in real oil price uncertainty. Both the empirical and theoretical results are shown to be robust to a number of variations to the models.
  • Clearing Up the Fiscal Multiplier Morass.   Joint with Eric M. Leeper and Todd B. Walker.
    Bayesian prior predictive analysis of five nested DSGE models suggests that model specifications and prior distributions tightly circumscribe the range of possible government spending multipliers. Multipliers are decomposed into wealth and substitution effects, yielding uniform comparisons across models. By constraining the multiplier to tight ranges, model and prior selections bias results, revealing less about fiscal effects in data than about the lenses through which researchers choose to interpret data. When monetary policy actively targets inflation, output multipliers can exceed one, but investment multipliers are likely to be negative. Passive monetary policy produces consistently strong multipliers for output, consumption, and investment.

  • The Implications of Tax Foresight for Optimal Monetary Policy
    Legislative and implementation lags inherent in the political process often allow private agents to receive news about their future tax rates, giving agents "tax foresight." This paper investigates the effects of tax foresight on monetary policy under various assumptions about the information set of the monetary authority. We examine the welfare effects of tax foresight and how such foresight affects the monetary authority's ability to implement its policy. Our model is a simple version of the dynamic sticky price models extended to include possible foresight about changes in distortionary taxes. We find that the optimal response of the interest rate to anticipated tax changes can be qualitatively different from the response under a simple Taylor rule and that welfare rankings under foresight depend crucially on the welfare measure. In addition, identification issues present when the monetary authority has partial information about the state of the economy make it impossible for the monetary authority to recover the correct structural disturbances from its observable variables. This, in turn, causes the monetary authority to induce history dependence in endogenous variables and worsen the welfare of private agents.

  • Selected Works in Progress:

  • Sovereign Risk and Spillovers: Untangling the Web In Europe. Joint with Huixin Bi.