The effects of monetary policy across fiscal regimes
Gepubliceerd: 05 december 2022
We estimate the effects of monetary policy shocks across contractionary and expansion- ary fiscal regimes in the euro area. An expansionary monetary policy shock leads to an increase in inflation and output growth, but only when it occurs in the expansionary fiscal regime. In a contractionary fiscal regime, the responses to a monetary easing are insignificant or even negative. Similarly, a monetary tightening only reduces inflation and output in the contractionary fiscal regime. These results are robust to several alternative model specifications and underline the importance of the fiscal stance for the monetary transmission mechanism.
Keywords: regime-dependent effects of monetary policy; fiscal policy regimes, local projection methods
JEL codes E52; E62; E63
Working paper no. 755
755 - The effects of monetary policy across fiscal regimes
Research highlights
- We estimate the effects of monetary policy across contractionary and expansionary fiscal regimes in the EA.
- A contractionary monetary policy shock leads to a decline in inflation and output, but only if fiscal policy is also contractionary.
- The monetary policy transmission mechanism depends more strongly on the fiscal stance during a recession than during a boom, and when the fiscal regime is defined by changes in government expenditures.
- Current expansionary and ill-targeted fiscal measures are likely to significantly undermine the central bank in achieving its inflation target
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