Monetary and fiscal policy in the transition to EMU: what do SVAR models tell us?

Abstract

On the basis of SVAR models of monetary and fiscal policy in France, Germany and the euro area for the period 1979:1–2000:2, it appears that, during these two decades, monetary shocks exhibit significant correlation while fiscal shocks—which are closely linked to standard measures of structural deficits—are uncorrelated between France and Germany. At the same time, euro area fiscal shocks, especially in the 1990s, are largely impulsed by Germany. It is difficult, however, to conclude that the latter shocks reflect purely idiosyncratic shocks, as they often reveal differences in the timing of fiscal adjustments. The macroeconomic effects of monetary and fiscal policy are shown to be consistent with the ISLM model, but, from a statistical point of view, they are usually more significant for monetary policy than for fiscal policy shocks.