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Working Papers

Jared Laxton, Douglas Laxton, Shady Fakhoury, Asya Kostanyan

Working Paper N2026-03
00:00 / 25:02

Abstract

Quarterly Projection Models (QPMs) became influential at inflation-targeting central banks because they provided a parsimonious, accessible, and internally consistent framework for organizing forecasts and communicating monetary policy. Their success also created understandable pressure to expand them to cover an increasing range of economic questions. This paper argues that fiscal policy illustrates the limits of that expansion. Fiscal effects depend fundamentally on the instrument, incidence, timing, financing, monetary-policy response, supply effects, and state of the economy, information that cannot generally be recovered from an aggregate deficit or fiscal impulse. Embedding such aggregates directly in a semi-structural gap model can therefore give reduced-form forecasting relationships an unwarranted structural interpretation. We propose a narrower role for fiscal variables in QPMs: automatic stabilizers, cyclical budget relationships, debt dynamics, and other fiscal aggregates can be incorporated for accounting and reporting purposes, while discretionary fiscal transmission is analyzed outside the core model using historical evidence, empirical estimates, structural models, and judgment. The resulting fiscal assessment can then condition the QPM forecast. More generally, we argue that comprehensiveness should be a property of the policy process rather than a requirement that every relevant mechanism be embedded in one production model. This division of labor preserves the QPM's original comparative advantage while placing fiscal analysis within a broader suite-of-models framework.
 

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